Zip Codes and Car Insurance Rates – Why Location Matters

Why can auto insurance in Philadelphia cost more than in San Antonio? Or the cost in the suburbs be lower than the inner city? Location is important in car insurance, and here's why.

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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.

Zip Code is the largest rate impacting 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 the biggest impact on car insurance rates is the zip code on your car insurance policy.

Why is my Zip Code 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.

car insurance rate factors

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.

Providing your Zip Code is actually a good thing!

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.