Here’s a story I’m sure you’ve heard a thousand times before:
A middle-aged, middle-class attorney gets divorced, and moves out of his house in the suburbs. Still saddled with a large mortgage and confiscatory property taxes on a house in which he is no longer able to live, there’s not much money to live anywhere nice. So he moves into a real dump in the city.
He also cavorts with women who are too young for him, and gets the citation to Lochner v. New York, 198 U.S. 45 (1905) tattooed on his arm, but that’s a story for a different column.
Anyway, among the other indignities of being cast out from middle-aged, middle-class society, his rate for auto insurance goes up, because he moved into a different ZIP code. He soon discovers why – the street on which he lives is perpetually littered with the broken windows of the cars that were broken into the night before.
His own car is frequently broken into, too, until he eventually stops locking it, figuring it is cheaper to just let the looters search for what they want than to have them break a window and then search for what they want.
Eventually, he tires of this and moves back to the suburbs, and his rates go back down. What he does not do is bemoan that it is unfair that his insurance went up, and cry to the legislature to prohibit insurance companies from using ZIP codes as a factor in setting rates.
But if Senate Bill 289 becomes law, insurers would be prohibited from doing so, effectively requiring those outside the city to subsidize city dwellers’ insurance.
“This makes no sense,” Sen. Tim Carpenter, D-Milwaukee, whined in an interview with the Wisconsin State Journal. “I don’t think good drivers should have to pay extra because other parts of their ZIP code, which could be miles away, may have higher crime rates or more irresponsible drivers.”
I will admit that the current situation is unfair, if you look only at individual drivers. But the reality is that the actuaries have done the math, and determined that, in the aggregate, where you live affects the likelihood that you will submit a claim.
Every other factor that insurance companies look at is just as unfair, if you look only at a given individual who is a safe driver but pays a higher rate than some given unsafe driver.
For insurance companies, though, the only way to be profitable is to find reliable factors for predicting claims, and base rates on those factors, whatever they may be.
If ZIP codes are prohibited as a factor, even though they are reliable predictors, then in the aggregate insurance companies will lose money on customers in those ZIP codes, and will have to raise rates on those outside the city to cover their losses.
It would certainly make for remarkably perverse incentives for insurance agents. Instead of giving bonuses to agents who book a lot of business, agents who work in the city would instead be given bonuses if they lose customers. After all, why would insurers reward the agents who lose them the most money? And the agents who sign up the most new customers in the city will necessarily be the agents who lose the shareholders the most.
I agree it’s unfair to charge city dwellers more for insurance. It’s also unfair to charge singles more than married people. It’s unfair to charge more if someone has bad credit. It’s unfair to charge more because the driver once had coverage terminated for failure to pay a premium. It’s unfair to charge a teetotaler who hasn’t had a drink since he was arrested once for OWI more than someone who drives drunk every night, but has never been caught.
But the actuaries have found that all those factors are reliable predictors that the driver will submit a claim.
Yes, I agree that insurance rates are unfair. So is life. But healthy normally adjusted people stopped whining that life is unfair when they were eleven years old. In Wisconsin, apparently, the rest join the state Legislature.
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September 30th, 2009 at 3:48 pm
Has anyone with the WLJ vetted this commentary? Its sophomoric tone, unchecked assumptions, and lack of any citation to authority seem more appropriate to talk radio than to the pages of a legal journal. For example, the piece asserts without citation to a single study or authority that zip codes have been demonstrated to be reliable predictors of driving behavior and that they are used to increase rates in proportion with their validity as a predictor. A few google searches makes it clear that this contention is subject to considerable dispute. Also, it fails to cite the other states that have already enacted such a law, such as California. Finally, it fails to give any meaningful context on the scope of the problem–just how bad is a change in zip code for your premium? 10%? 80%? From personal experience living in the city of Baltimore, I know my auto insurance doubled when I moved to the city. When I later moved to a new zip code 3 miles away in the county, my insurance rate was halved. Move 3 miles and see a 100% change in rates! Would a couple of accidents have resulted in a doubling of a driver’s insurance rates? I’m not sure, but I suspect not. Is zip code more determinative a factor than having accidents? I still don’t know…this piece doesn’t give me any answers.
October 1st, 2009 at 7:26 am
Car insurance covers more than accidents. The crime rate in certain zip codes varies greatly, from the high crime of Milwaukee’s central city to the almost no crime of the rich suburb, Mequon. Rather than fix the budget, stop scandal in state government or do anything to really help the citizenry, some legislators like to play games to make themselves look good at the taxpayers’ expense. This is clearly one of those cases.
October 1st, 2009 at 1:09 pm
You’re just on the cusp of understanding, Mr. Anderson, but not quite there. I haven’t the foggiest idea whether ZIP code or prior driving record is a better indicator of the likelihood an insured will submit a claim. And neither do you. But the actuaries at the insurance companies get paid to know this. And if they are wrong, the insurance company will go bankrupt; if they are right, it will profit.
If they have determined that ZIP code is a reliable predictor, then any government that dictates they must regard that fact has stopped performing a permissible function of government — protecting contract rights — and has become a destroyer of contract rights instead.
October 1st, 2009 at 5:45 pm
Fascinating #3. Sophomoric tone? It’s a commentary. And the issue isn’t whether it’s fair practice, effective or what other states might have enacted. The issue is whether some “sophomoric,” generally naive and inexperienced Wisconsin pols have any business telling a private company what it should charge for its product. And I don’t need any citations for my comment.
October 2nd, 2009 at 10:16 am
Mr. Ziemer,
Thank you for your response. I understand your point to be that actuarial science and the free market are the best available tools for setting insurance price, and that government regulation of that price setting mechanism will lead to market distortions and government functioning as a “destroyer of contract rights”. As you know, Wisconsin has, over the last century or so, enacted a number of limitations that effectively interfere with the price setting mechanism you refererence. The statutes include a prohibition against setting price based upon race or gender, for example. Of course, these prohibitions interfere with contract and the determinations of actuarial science, but I think you would acknowledge their validity as sound public policy.
My first point in writing my commentary was only to point out that, among other things, the characterizations of the statements of state senators such as follows, even in a commentary piece, seemed to me mind to be uncivil, and not the sort of discourse suitable for publication in a law journal.
October 2nd, 2009 at 4:03 pm
Well, Mr. Brian D. Anderson has outdone himself once again. A very typical liberal tactic. Play the race card to end the discussion and debate. Way to go Mr. Brian D. Anderson! You’re logic is infallible. Because it is ok to pass laws outlawing race discrimination it is equally ok to pass laws regulating price discrimination based on ZIP codes. You win.
October 8th, 2009 at 2:47 pm
Ziemer,
When you are able to live in a gated community far away from the crime and congestion of the inner city it’s easy to say that the rates should be different. There are a couple of factors though, that you aren’t taking into consideration.
What is the value of the cars that are driven in the suburbs? Are they driving as many expensive cars in the inner city? A scratch on a Lexus in the parking lot of the mall could cost twice as much as a broken window and stolen radio on a Ford Escort in the inner city.
Suppose I’m driving a car that I paid for with cash, like a responsible adult, and I only paid $2000 for this car. I’m not required to buy comprehensive insurance on that car but I am required to “maintain financial responsibility” by purchasing liability insurance. An interference with the contract rights of the individual that no big insurance company has a problem with. Now my insurance requirements are designed to cover any car that might be driving down the road, regardless of which zip code it might come from. If I choose to drive a reasonably priced vehicle why should I be required to carry coverage that covers the most expensive cars on the road? Is the zip code taken into consideration then? NO! These liability minimums are set on a statewide level and again, insurance companies have no problem with this kind of inequity because it profits them.
If it’s ok for the the insurance companies and agents to lobby “whining” lawmakers to require every driver in the state to buy their products then why should they whine when the state tries to limit their discriminatory practices?
October 8th, 2009 at 3:47 pm
mr. bridges, the laws may be different where you are, but here in Wisconsin, there is no financial responsibility law. you don’t have to have insurance. if you do have insurance, though, there is a minimum amount of coverage that you can buy. That amount is going up. However, that change in the law was pushed by the plaintiffs’ bar over the objections of the insurance industry. So, its not very accurate to blame the insurance company for “whining” for something they actually opposed.
October 8th, 2009 at 3:53 pm
As far as it being unfair though that people with $2,000 cars need to carry liability insurance to replace cars worth tens of thousands, I agree its unfair. effectively people with modest cars subsidize those with expensive ones. But that’s a different matter than whether insurers can take ZIP code into account. I don’t know that there would be any legislative solution to this problem.
October 22nd, 2010 at 1:26 am
Every other factor that insurance companies look at is just as unfair, if you look only at a given individual who is a safe driver but pays a higher rate than some given unsafe driver.