You asked (1) if territorial rating is legal, (2) for the average cost of motor vehicle insurance for a suburban driver versus an urban driver, (3) for the main criteria insurers use to develop motor vehicle insurance rates, and (4) what can be done to lower rates for urban drivers.

SUMMARY

Territorial rating, basing auto insurance rates on where a driver garages a vehicle, is legal in Connecticut, permitted in all other states, and a common insurance industry practice. In Connecticut, rates vary between urban and suburban areas and by policy based on various factors, including a driver’s age, gender, marital status, vehicle, driving history, and credit score.

Minimum insurance coverage for a 2004 car costs on average $ 1,080 in urban Hartford and $ 677 in suburban Hartford; $ 925 in urban New Haven and $ 705 in suburban New Haven; $ 756 in urban Waterbury and $ 639 in suburban Waterbury (see OLR Report 2004-R-0410, attached).

Steps that can be taken to lower insurance rates for urban drivers include reducing the weight of territorial experience permitted in rate setting (currently 75%), issuing low-cost policies to low-income residents, and requiring insurers to write a certain amount of policies in urban communities.

For an extensive discussion of this topic, see Pricing Auto Insurance: A Study of Ratemaking in Connecticut, National Conference of State Legislatures, April 2001 (available in the Legislative Library; Executive Summary attached).

TERRITORIAL RATING

Territorial rating is an insurance rate setting method that divides a state into distinct geographical territories and sets rates for each territory based on its aggregate loss experience. It is legal and permitted in all states. Compared to suburban or rural areas, urban centers have a greater population per mile of road; a higher traffic concentration; and more auto accidents, theft, and vandalism. Thus, insurance actuaries can demonstrate more losses in urban areas, justifying higher rates in these areas.

Insurers establish base rates for each territory and then apply other risk factors specific to the individual driver to determine the rate to charge for a particular motor vehicle insurance policy. The other risk factors primarily used are age, gender, marital status, driving history, vehicle make and model, and credit score.

Base rates are derived from gathering data on territorial and statewide experience. The Connecticut Insurance Department requires a 75%/25% weighting of territorial versus statewide experience. This means that the base rate gives 75% weight to the territorial experience and 25% weight to the statewide experience. Factoring in the statewide experience helps temper the rates in urban areas, but affects rates throughout the state. In general, the less weight given to territorial experience, the lower auto insurance rates are in urban areas, but with a related increase in rates in all other areas of the state.

OLR Report 2004-R-0410 (attached) provides the average insurance rates for each rating territory assuming a territorial experience weight of 100%, 75% (Connecticut’s current method), 50%, and 10%. This information shows the differences between urban, suburban, and all other areas of Connecticut. OLR Report 2005-R-0714 and Insurance Department Bulletin PC-36 (attached) provide information on the rate filing process insurers and the Insurance Department follow for motor vehicle insurance rates.

Other states concerned with the availability and affordability of insurance in urban areas are exploring ways to give urban drivers insurance options. For example, Maryland is considering a pay-as-you-drive option, which would base rates on miles driven instead of location. Since urban drivers tend to drive fewer miles than suburban or rural drivers, this theoretically would decrease rates for urban drivers. New Jersey has established the Dollar-A-Day auto insurance program that provides low cost coverage for low-income drivers and requires insurers to issue at least 10% of all policies in urban areas. California also has introduced a low cost auto insurance program in six urban counties. (See Urban Insurance Issues, prepared by the Insurance Information Institute at www. iii. org/media/hottopics/insurance/urban/, attached. )

JLK: ro