Just about everything you read or hear about car insurance rates refers to a mythical “average” rate that smooths out differences in driver age, driving record, vehicle type, and especially location.
Where you live can have a massive impact on how much car insurance costs. For example, states like Maine and Iowa have an average rate of under $1,000 a year, while drivers may pay over $2,000 annually in states like Louisiana and Michigan.
Your Zip Code is a Huge Factor
Car insurance companies use a lot of different factors to come up with the rate you pay for a car insurance policy. Details like whether you’re married, if you own your home, if you have good or poor credit, and your claim history all contribute positively or negatively to the policy premium.
But the one factor that has one of the biggest impacts on car insurance rates is the zip code on your car insurance policy.
Why Your Zip Code Affects the Rate You Pay
It may seem odd that a little five-digit number can have such a big effect on insurance rates. But here are some of the reasons why your Zip Code has such a large impact:
- Accident Rates and Traffic Density: Urban areas with dense traffic tend to have higher accident rates compared to rural areas. Insurers consider the likelihood of accidents when they calculate car insurance rates. A Zip Code with a high frequency of accidents will generally see higher insurance rates.
- Crime Rates, Especially Vehicle Thefts: Areas with high crime rates, particularly those with high rates of vehicle thefts or vandalism, pose a greater risk for insurers. If your Zip Code falls into an area with elevated crime rates, your insurance premiums are likely to be higher to offset the increased risk.
- Environmental Risks and Weather-Related Claims: Certain locations are more prone to severe weather conditions like floods, hurricanes, or hailstorms. Residing in a Zip Code that experiences these environmental challenges can lead to higher insurance rates due to the increased risk of weather-related damage to your vehicle.
- State and Local Regulations: Insurance laws and requirements vary by state and can even differ within regions of a state. The regulations in place in your Zip Code can affect the types of coverage you need and the overall cost of your insurance.
- Cost of Repairs and Medical Care: The cost of vehicle repairs and medical care in your area can influence your insurance rates. In regions where these costs are higher, car insurance rates typically rise accordingly.
Why Your Zip Code is Important for Car Insurance Quotes
Where you live, or more accurately your zip code, helps car insurance companies predict the likelihood of them having to pay a claim. This is called underwriting, and it is used by every insurance company to help ensure they earn a profit.
The job of insurance underwriters and actuaries is to attempt to accurately predict the chance of loss on every auto insurance policy written. This includes assembling location-based data such as weather events (tornadoes, floods and hail), vehicle theft and vandalism statistics, vehicle safety data, past vehicle claim data, and much more into a formula that is used for future loss prediction.
The more specific the data is that goes into loss prediction, the more car insurance rates can be tailored for specific zip codes and even different segments within the same zip code. Once a base rate is established for a particular zip code, other factors like driver age and vehicle type can be added into the calculation to fine-tune the rate specifically for your personal situation.
For a complete discussion of the factors that affect car insurance rates, see our Car Insurance 101 article: Drive Your Car Insurance Cost Down: Understanding Rate Factors.
Providing your Zip Code is Actually a Good Thing (Usually)
Entering a zip code for a car insurance quote isn’t an intrusion on your personal privacy or an attempt to track your location, but rather it’s the only way to get accurate car insurance quotes and possibly save you money on your next policy.
Imagine if we lived in a vanilla society where all car insurance costs the same, regardless of location. That’s great if you live in an area with a lot of insurance exposure, because other people would subsidize your insurance rates!
But if you live in an area where there are few weather-related claims, low rates of vandalism, less frequent collision claims, and few vehicle thefts, you will be the one paying higher rates to subsidize other policyholders who live in more expensive areas.
Doesn’t sound fair does it?
Zip Codes to the Rescue
Enter the use of zip codes for generating car insurance rates. (applause)
Now that claim data can be tracked down to specific zip codes and territories, it allows car insurance providers to get very specific when pricing car insurance. This benefits them in that they have a better chance of predicting future claim frequency and severity (i.e., profitability).
It also benefits you because because you will be getting a fair rate based on where you choose to live. It may be higher or lower than average, but it will be an accurate rate based on actual historical data.
So, in a nutshell, that’s explains why using zip codes for car insurance is really a good thing.