Love thy neighbor? You may not, once you realize how much your neighbors influence your auto insurance rates.
Alyssa Willis, an agent at Annette Willis Insurance Agency in South Florida, says that in addition to factors like your credit score and driving history, your auto insurance rates are based partly on the experience that your insurance company has with all of the policies it issues. If an auto insurance company collects premiums totaling $1 million but pays out $2 million in claims, all of the company's policyholders likely will see a hike in their rates, Willis says.
“Then companies look at what geographic areas have the highest percent of claims and raise drivers’ rates in those neighborhoods,” Willis says.
So if you live in a neighborhood with a lot of drivers who tend to crash or where a lot of car break-ins and thefts occur, you might pay more to cover the insurance company’s claims in that area.
Drivers in your area who have filed numerous claims -- or even just one or two -- will see heftier increases in their premiums than those with no claims and a spotless driving record. Nonetheless, Willis says, everyone in the neighborhood probably will experience a bump in rates.
How high might the rates soar?
Typically 20 percent to 30 percent, according to Steve Brooks, president of B & B Premier Insurance Solutions, a brokerage in Agoura Hills, Calif. “They could even double, depending on the number of claims filed by people in your area," he says.
A shocking discovery
When Dale Martin moved just one town over, he got an unwelcome surprise in the mail -- a notice that his auto insurance premium had gone up.
“I moved about 15 minutes from my old neighborhood and my car insurance premium jumped almost $200 a year,” says Martin, who lives in the Chicago suburbs.
Martin says his new neighborhood -- which has a different ZIP code than his previous home --was rated as “on the decline” by Insurance Services Office Inc., a major provider of data to insurance companies, despite a drop in crime rates and a healthy rise in housing prices.
“I was shocked because my new neighborhood has not been on the decline in many, many years,” Martin says. “So even though I had never filed a claim and hadn’t been issued a ticket in almost 20 years, my rates still went up just because I moved.”
Asking his agent about the premium hike didn’t yield Martin much relief: “He said there wasn’t anything I could do. My ZIP code is what it is, and so are the rates associated with it.”
Switching car insurance companies eased some of the pain, Martin says. However, he saved only $80 a year, and his auto insurance rate hasn't returned to the pre-move level.
Robert Hunter, director of insurance at the Consumer Federation of America, isn’t surprised. “Instead of judging each customer individually, insurance companies judge drivers by their ZIP codes and demographic region,” Hunter says.
Five-number code part of premium equation
Which demographic regions are likely to get punished most when it comes to auto insurance rates? Densely populated urban areas.
According to the Highway Loss Data Institute, crashes that cause injuries or property damage occur more often in urban areas. A 2008 Insurance Research Council study of a national sample of insurance claims for auto crashes found that 80 percent of injury accidents happened in urban areas.
Willis says the tracking of ZIP codes helps auto insurance companies pinpoint areas -- primarily urban settings -- that pose the highest risk of claims being filed.
So you can expect to pay more for auto insurance if you live in a heavily congested ZIP code in New York City, Los Angeles, Detroit or Atlanta than in a quiet suburb of Des Moines, Iowa, or Louisville, Ky.
“There are more claims filed in areas that are heavily populated, so that means you’re going to pay more if your ZIP code is in an urban area,” she says.
But even if you live in – or move to – a ZIP code labeled on the decline or one packed with reckless drivers, you might be able to avoid sky-high auto insurance premiums.
“Each insurance company sets its own rates, so one high-claim ZIP code for one company might not necessarily be as equally risky for another,” Brooks says.
To secure the best rate for your ZIP code, Hunter suggests shopping around. “Get car insurance quotes from several companies or work with an independent agent who represents many different companies to find the best rate and coverage,” he says.
But Hunter cautions that you might have to look outside your neighborhood for an agent.
“Insurance companies don’t like to place agents in poor or high-risk areas like those rated as 'on the decline,'” Hunter says. “So to maximize profits, car insurance companies place agents in rich areas and suburbs, because they don’t think there good drivers reside in poor or 'declining' areas.”