Why Do Car Insurance Rates Fluctuate by Zip Code?
At first blush, geography may not seem to have much bearing on car insurance. However, geographic location, ZIP code specifically, is one of biggest determinants of car insurance premiums. To illustrate the powerful effect location can have on car insurance premiums, compare the average annual auto premiums in Detroit, $5,072, to that of Eau Claire, WI, $869. For a difference of that magnitude, location must powerfully relate to the kind of risk your vehicle presents to your insurer. In this post, we'll discuss the connection between ZIP codes and auto insurance premiums and explain why ZIP codes are an accurate metric for risk.
Auto Theft Risk
Comprehensive coverage will reimburse you in the event your vehicle is stolen, and the likelihood of this happening is primarily determined by where you regularly park your vehicle. Of course, auto theft rates vary by location, and insurers rely on ZIP code to define a geographic area in order to assess its car theft rates. If you live in a ZIP code with elevated auto theft rates, your car has a greater chance of being stolen, which means you are more likely to file a claim. A higher claims risk for auto insurers means higher premiums for you. The best way to understand this is to compare the theft rates of two example cities: Phoenix, AZ and Marion, IA. The auto theft rate in Phoenix is a whopping 3.05 times the national average. By contrast, the Marion auto theft rate is a paltry 0.12 times the national average. Clearly, policyholders with a Marion ZIP code are far less likely to file a theft claim than those with a Phoenix ZIP code, and Marion drivers enjoy far less expensive premiums as a result.
Urban Areas Elevate Risk
Los Angeles, Washington, D.C., Philadelphia, and Detroit are all in the top five most expensive cities for auto insurance premiums. What do these cities have in common that hikes up their residents' rates? Each of these cities is a highly populated urban area, which spells trouble for car insurers. Large numbers of people concentrated in one area leads to more traffic, more collisions, and more car insurance claims. Auto insurance is always more expensive in urban ZIP codes because of the high-density traffic and increased likelihood of fraud. This simple principle explains the typically large disparity between the car insurance premiums for big-city ZIP codes and those of less populous smaller towns.
Population density and auto theft rates are not the only risks that can be assessed by ZIP code. Other factors, such as red-light running and the number of uninsured drivers on the road, also account for the premium disparities among ZIP codes. For example, Phoenix tops the list of the most dangerous cities for red-light fatalities according to the Insurance Institute for Highway Safety. It stands to reason, then, that policyholders in Phoenix ZIP codes will pay the price in the form of higher premiums because of residents' tendency toward aggressive driving. Likewise, if insurers constantly have to shell out additional cash because of many collisions with uninsured drivers, premiums will reflect this for ZIP codes with large numbers of uninsured drivers. In Mississippi, for example, 26% of drivers are uninsured, which means residents will pay more for car insurance than they would in a state like Maine, where only 4% of drivers are uninsured.