Commentary: Boohoo! Insurance rates are unfair

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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.