Conn. Legislation Underscores Common Insurance Rating Issue

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Auto insurers across the country routinely take a policyholder’s home address into account when assessing risk and setting the price for coverage, but two Connecticut lawmakers want to end the practice in their state.

The sponsors of a new bill to end territorial rating in Connecticut both represent the urban city of Bridgeport, which is home to some of the highest car insurance costs in the state. The reason why Bridgeport’s average costs have been so high is that drivers who live in the city have established a loss record that is worse than most other cities in the state, and they consequently have restricted access to low cost car insurance.

This is because statistics have shown that drivers in urban areas tend to make more claims than their rural counterparts, which often gets attributed to the fact that urban areas have more traffic congestion, more accidents and higher crime rates (which affects the cost of coverages that insure against theft).

According to the Insurance Information Institute, studies have shown that the place where a policyholder garages his or her vehicle is one of the most accurate predictors of future loss, so it is widely used to evaluate risk.

But while the opinion of the insurance industry and many state regulators is that territorial rating is a statistically sound pricing factor that assesses higher premiums to the people who are likely to use a greater proportion of insurer resources, state representatives Jack Hennessy and Don Clemens believe that it puts an undue burden on urban residents.

“It is unfair for people living in urban areas to be charged a huge amount due to the territorial rating of the vicinity in which their vehicle is garaged,” says Rep. Hennessy.

A report on the issue conducted by the state’s Office of Legislative Research in 2004 quantified the issue, showing that even different areas within the same city can have wide differences in the price of coverage due to territorial rating practices.

In the city of Hartford, the report showed, drivers in the urban areas of the city paid nearly 40 percent more for coverage when compared to drivers living in suburban areas.

If territorial rating were to be banned, rates for motorists in places like Hartford and Bridgeport would fall by more than 25 percent.

But passage of the bill would make Connecticut the only state in the country that bars insurers from using home address in rate calculations. States like California and New Jersey have enacted restrictions on the role that a person’s home address can play in pricing, but none ban the use of this factor completely.

And in fact Connecticut already has regulations that restrict the weighting of a person’s address in rate calculations. Insurers in Connecticut currently can only allow a person’s territory to make up 75 percent of the overall territorial factor. The other 25 percent must reflect the loss history of a state overall. In effect this reduces the price of coverage for people living in areas with loss histories that are worse than the state average and raises prices for those living in areas with histories that are better than the state average.

The new bill introduced by Hennessy and Clemons is not the first to aim to adjust territorial pricing, though. Hennessy has been introducing similar measures to the state legislature for years, but none of received much attention.

In 2009, another group of legislators came close to reducing the effect of territorial rating by changing the weight from 75/25 to 50/50, but the bill ultimately died.

About Matthew Morisset
Matthew Morisset is a proud alumnus of the University of Redlands, where he obtained a degree in English Literature. Utilizing his passion for analysis and writing, Matthew looks for important trends in the auto insurance industry and their implications for consumers and the market as a whole.

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