OLR Research Report

September 11, 2006




By: Janet L. Kaminski, Associate Legislative Attorney

You asked (1) in which states insurers use territorial rating when setting premiums for auto insurance policies, (2) what criteria those states use to establish the territories (e.g., zip code, municipal boundaries), and (3) how rates are set in states that do not use territorial rating.


Rate setting is an insurer's process of calculating a price to cover the future cost of insurance claims, administrative expenses, and a profit margin. Territorial rating is the practice of auto insurance companies factoring in the principle place a driver garages his vehicle when setting auto insurance rates. An insurer uses data showing auto losses (e.g., accidents and thefts) by geographic location to establish the rating territories. Auto insurance rates in dense urban areas tend to be higher than in more rural areas because of traffic congestion, road configurations (roads in older cities may not have been planned with cars in mind), crime rates, and accident rates. Actuarial studies have found where a person garages his vehicle is the most accurate prediction of loss, while an individual's driving history is among the least predictive because the average driver has so few claims over his lifetime (Insurance Information Institute, Rates and Regulation, August 2006, p. 16).

All states permit insurers to use—and insurers in all states use—territorial rating when setting premiums for auto insurance, although California, Connecticut, Massachusetts, and New Jersey have special rules regarding its use, according to the National Association of Insurance Commissioners (NAIC). In addition, under Florida law, using a single zip code as a rating territory is considered unfairly discriminatory, and is thus prohibited. Principle place of garaging is typically used in addition to other variables, e.g., make, model, and value of the vehicle; gender; age; marital status; driving history. (The variables used and the relative weight assigned each vary by state and insurance company.) The states' insurance departments must approve the rating territories prior to their use, according to the Insurance Information Institute.


Connecticut has 18 auto insurance rating territories. Rates vary between urban and suburban areas and by other various factors, including a driver's age, gender, marital status, vehicle, driving history, and credit score. Insurers derive base rates by 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.

For more information regarding territorial rating and auto insurance rates in Connecticut, refer to the following OLR Reports: 2005-R-0917, 2005-R-0714, 2004-R-0712, and 2004-R-0410. A copy of each is enclosed.


In California, each insurer may calculate its own auto insurance rates based on its past loss experience and expenses and rating plans must be filed for approval before use. California's auto insurance nondiscrimination law prohibits insurers from considering location within a geographic area as a condition or risk for which higher rate or premium may be charged for auto insurance. A geographic area or territory of the state, as used in an insurer's rating plan, must be at least 20 square miles. A record of loss experience per geographic area, including a breakdown by each zip code in the geographic area, must be filed annually with the insurance commissioner (Cal. Ins. Code 11628(a)).

Proposition 103, adopted by California voters in 1988, established uniform guidelines for how an insurer must determine an individual's premium. There are three mandatory primary factors to be considered: the individual's driving safety record, the number of miles driven annually, and the number of years of driving experience. There are 16 optional secondary rating factors that an insurer may use all or some of in combination to calculate premiums, including claims frequency and severity of where the vehicle is garaged. The optional factors cannot be weighted as heavily as the primary factors. The secondary factors that an insurer may consider are:

1. type of vehicle;

2. vehicle performance capabilities, including alterations made subsequent to the original manufacturing;

3. vehicle use (pleasure only, commuting, business, farm, etc.);

4. percentage use of the vehicle by the driver being rated;

5. multi-vehicle household;

6. academic standing of the rated driver;

7. rated driver's completion of driving training or defensive driving courses;

8. vehicle characteristics, including engine size, safety and protective devices, damageability, reparability, and theft deterrent devices;

9. rated driver's gender;

10. rated driver's marital status;

11. policy persistency (e.g., renewed policy vs. new policy);

12. rated driver's smoker status;

13. secondary driver characteristics (i.e., a combination of safety record, years licensed, gender, marital status, driver training, and academic status);

14. multiple policies with the same or an affiliated company;

15. relative claims frequency; and

16. relative claims severity.

Relative claims frequency and severity are the territorial rating components, reflecting where an insured vehicle is garaged. These categories must be based on grouping state zip codes into bands. Alternately, the bands could be based on grouping the state census tracts. Each band must contain areas with a similar average claims frequency or severity, respectively (Cal. Ins. Code 1861.02, Cal. Code Regs. tit. 10 2632.5).

The weights of the factors used to calculate a driver's premium must be aligned in decreasing order. Driving safety record must have the most weight, followed by annual miles driven, followed by years of driving experience, and followed by any and all optional factors, which may be in any order, with the exception of frequency and severity bands, which must be analyzed last. An insurer develops one weight for each of the mandatory factors and one for all optional factors combined for each coverage (e.g., liability bodily injury and property damage, uninsured/underinsured motorist bodily injury, uninsured property damage, comprehensive, collision, medical payments) (Cal. Ins. Code 1861.02, Cal. Code Regs. tit. 10 2632.7a-b and 8a). Drivers may be eligible for discounts if the satisfy the requirements (e.g., good driver, mature driver improvement course graduate) (Cal. Ins. Code 11628.3 and 1861.025).


Massachusetts uses 27 auto insurance rating territories. The main component that determines a community's territorial ranking is the claims experience charged to a community when a driver from that community is found to be legally at-fault for an accident. When territorial assignments are assessed, the four most recent years of claims experience for each community is compared to the same amount of claims experience statewide. More specifically, the loss per insured vehicle garaged in a community is compared to the loss per insured vehicle in the state as a whole based on the claims experience coverage. Catastrophic events, the quality and volume of vehicles in a community, and the variance in driver experience within a community are factored-

out in arriving at a territorial assignment. Massachusetts auto territory assignments can be viewed online at

Each year the Massachusetts Division of Insurance sets a statewide base rate—an average rate—for auto insurance policies. Massachusetts is the only state that has state-prescribed auto rates. Legislative reform is being debated that, if enacted, will move Massachusetts to a more competitive system with a territorial rating system similar to the one used in Connecticut (Insurance Information Institute, Rates and Regulation, August 2006, p. 3).

Insurers calculate a driver's actual insurance premium by making adjustments to the base rate. Adjustments are based on the driver's car, driving experience, and location, in addition to discounts permitted by law (e.g., low-mileage, passive restraint, anti-theft device, senior citizen) (See, M.G.L.A. 175 113B). Newer and more expensive vehicles will increase the rate. Inexperienced drivers (those with less than six years of driving experience) will pay higher premiums than drivers with six or more years of experience. Residents of towns with higher claim costs will pay higher premiums than those from towns with lower claim costs (Massachusetts Consumer Affairs and Business Regulation's insurance premium calculations brochure viewed online 9/7/2006 at


New Jersey has 27 auto insurance rating territories. The territories were developed for rating purposes more than 50 years ago. A description of the territories, as described by the New Jersey Department of Banking and Insurance (DOBI), is enclosed and may be found at The governor appointed an advisory commission to develop a new state common territorial rating plan, which is expected to be completed in 2006, as required by law (N.J.S.A. 17:29A-50).

Each insurer must have its territorial rating plan approved by the DOBI. An insurer may use the common territorial rating plan or an approved territorial rating plan it developed based on its own policyholders' claims experience. The DOBI will not approve any plan that does not comply with statutory and regulatory requirements, or that has anticompetitive implications for insurers in the State. At least once every five years, an insurer must review its territorial rating plan for continued validity and report findings to the DOBI (N.J.S.A. 17:29A-49). The DOBI also will not approve any rating plan that creates

territorial relativities that are significantly disproportionate to those in place on May 19, 1998, the effective date of the Automobile Insurance Cost Reduction Act (See, N.J.S.A. 39:6A-1.1, et seq) (N.J.S.A. 17:29A-36).

When establishing territorial rating plans, New Jersey law (N.J.S.A. 17:29A-48) requires the following:

1. Territories must be defined so that one can recognize throughout the territorial rating plan both qualitative similarities and qualitative differences in driving environments or mix of driving environments, which may include, but not be limited to, traffic density, population density, comparative severity of loss, and the degree of homogeneity within a territory in terms of driving environments, population, and driver classification;

2. A territory must be comprised of contiguous towns or cities;

3. Territories must contain a sufficient number of exposures to result in statistically credible experience, in accordance with regulations established by the commissioner, and must be defined in a manner that minimizes the effect of loss variability in a territory on a year-to-year basis;

4. Territory definitions must take into account the impact of the overlapping of traffic patterns on exposure to loss, including the relative number of intraterritory trips and inter-territory trips applicable to each proposed territory;

5. Territories created must result in an equitable distribution of exposures among territories throughout the state and no territorial rating plan may result in territories that are arbitrary, unfairly discriminatory, significantly disproportionate in terms of the number of exposures per territory, or created in a manner which is primarily for marketing purposes rather than measuring relativity of exposure to probable loss;

6. Territories created must not result in disproportionate differences in territorial relativity factors or territorial base rates between contiguous territories with similar driving environments or similar mix of driving environments;

7. Factors considered in establishing territorial rate relativities must take into account similarities or differences in driving environments or mix of driving environments, including traffic density, population density, mix of driver classifications within a territory, comparative degree of severity of loss, and the relative number of intraterritory and inter-territory trips;

8. Territories created must not result in unfair inter-territorial subsidization among territories with significant differences in driving environments or mix of driving environments, population density, traffic density, mix of driver classifications, and comparative degree of severity of loss;

9. For the purpose of defining territories and establishing territorial relativity factors, loss experience allocated to any territory by an insurer must (1) take into account any recovery applicable to exposures in the territory attributable to subrogation or any other kind of recovery and (2) not include any loss attributable to capping of driver classifications.

The auto insurance rate charged an insured driver cannot exceed 2.5 times the insurer's territorial base rate filed with the department, exclusive of driving record surcharges and discounts. The rate for the base class in any territory cannot exceed 1.35 times the insurer's statewide average base rate, exclusive of driving record surcharges and discounts for any basic policy (i.e., the minimum required coverage). The rate for a driver age 65 years or older cannot exceed 1.25 times the statewide average rate for all similar drivers, exclusive of driving surcharges and discounts. (N.J.S.A. 17:29A-36).

New Jersey permits insurers to classify applicants and insureds by rate tiers, assigning them based on risk characteristics common to that group of insureds. Insurers must file underwriting rules used for tier rating plans with the DOBI. No underwriting rule for implementing a tier rating plan may be based on the territory in which a driver resides or any other factor that is a surrogate for the territory (N.J. Admin Code tit. 11, 3-19A.5).