Topic:
AUTOMOBILE INSURANCE;
Location:
INSURANCE - MOTOR VEHICLE;
Scope:
Federal laws/regulations; Other States laws/regulations;

OLR Research Report


September 6, 1998 98-R-0986

FROM: Jerome Harleston, Senior Attorney

RE: Automobile Insurance Rating Differential between Urban and Suburban Territories

You asked (1) for a comparison of automobile insurance rates between urban and suburban territories in the state; (2) about territorial rating modifications in other states, including New Jersey; and (3) a summary and copy of Attorney General Blumenthal's recent report on automobile insurance rates in Connecticut.

SUMMARY

Automobile insurance rates in urban areas can be twice as high as rates in suburban towns. California, Connecticut, and South Carolina have adopted ways to modify rates based on territory. Michigan and New Jersey recently repealed their restrictions on territorial rating.

The attorney general's report claims that automobile insurance rates in Connecticut generally are excessive and worse in urban areas of the state. It recommends that Connecticut follow California's lead by adopting the so-called “sequential analysis method” in establishing rates. Under this approach driving record, driving experience, and miles driven are given the greatest weight in determining rates.

URBAN AND SUBURBAN RATE COMPARISON

Tables 1 to 4 and the related charts compare urban and suburban insurance rates. They are based on standard (S) and preferred (P) programs offered by insurers. Standard programs are for drivers meeting the insurer's requirements of acceptability; most policies are standard. Preferred programs are offered to drivers with excellent driving and claims records. The rates displayed are for two 40-year old adults; one drives for pleasure only, while the other drives to and from work seven miles each way. Both drivers have been licensed for more than three years with no chargeable accidents or violations within three years. One car is two years old worth $8,000, while the other is three years old worth $6,000. Annual mileage for each car is 10,000.

Table 1: Rates in Hartford and Select Territories

Company

Hartford

W. Hartford

Bloomfield

Avon

Allstate Insurance Co. (S)

$2,034

$1,429

$1,429

$1,233

Amica Mutual Insurance Co. (S)

$1,771

$1,262

$1,262

$1,235

General Accident Insurance Co. (S)

$3,013

$1,546

$1,546

$1,449

Government Employees (P)

$1,740

$1,253

$1,253

$1,216

Hartford Underwriters Insurance (S)

$3,100

$2,386

$2,386

$1,596

Liberty Mutual Fire (S)

$1,951

$1,339

$1,339

$1,185

Middlesex Mutual Assurance (S)

$2,070

$1,732

$1,732

$1,216

Nationwide Mutual Ins. Co. (P)

$1,618

$1,316

$1,316

$1,288

Peerless Insurance Co. (P)

$2,314

$1,165

$1,165

$ 994

Prudential Property and Casualty (P)

$2,018

$1,250

$1,250

$1,112

Phoenix Insurance Co. (P)

$2,498

$1,196

$1,196

$1,126


Travelers Indemnity Co. (S)

$2,932

$1,456

$1,456

$1,406

Table 2: Rates in Bridgeport and Select Territories

Company

Bridgeport

Stratford

Fairfield

Trumbull

Allstate Insurance Co. (S)

$1,869

$1,235

$$1,235

$1,272

Amica Mutual Insurance Co. (S)

$1,926

$1,477

$1,477

$1,361

General Accident Ins. Co. (S)

$2,826

$1,952

$1,952

$1,470

Government Employees Ins. (P)

$1,821

$1,438

$1,438

$1,326

Hartford Underwriters Insurance (S)

$3,060

$2,306

$2,306

$2,036

Liberty Mutual Fire (S)

$1,908

$1,245

$1,245

$1,219

Middlesex Mutual Assurance (S)

$2,246

$1,438

$1,438

$1,716

Nationwide Mutual Ins. Co. (P)

$1,694

$1,312

$1,312

$1,312

Peerless Insurance Co. (P)

$1,914

$1,239

$1,239

$1,160

Prudential Property and Casualty (P)

$1,904

$1,290

$1,290

$1,184

Phoenix Insurance Co. (P)

$2,684

$1,702

$1,702

$1,202

Travelers Indemnity Co. (S)

$3,190

$2,190

$2,190

$1,522


Table 3: Rates In New Haven And Select Territories

Company

New Haven

Hamden

Woodbridge

Branford

Allstate Insurance Co. (S)

$2,012

$1,649

$1,383

$1,383

Amica Mutual Ins. Co. (S)

$1,755

$1,624

$1,405

$1,405

General Accident Ins. Co. (S)

$2,555

$1,893

$1,844

$1,844

Government Employees Ins. (P)

$1,929

$1,471

$1,322

$1,322

Hartford Underwriters Insurance (S)

$3,268

$2,692

$2,218

$2,218

Liberty Mutual Fire (S)

$2,045

$1,609

$1,339

$1,339

Middlesex Mutual Assurance (S)

$2,254

$1,650

$1,370

$1,370

Nationwide Mutual Ins. Co. (P)

$1,802

$1,608

$1,391

$1,391

Peerless Insurance Co. (P)

$2,005

$1,397

$1,299

$1,299

Prudential Property and Casualty (P)

$2,460

$1,486

$1,486

$1,486

Phoenix Insurance. Co. (P)

$2,814

$1,932

$1,830

$1,830

Traveler Indemnity Co. (S)

$3,328

$2,450

$2,260

$2,260


Table 4: Rates In Waterbury And Select Territories

Company

Waterbury

Prospect

Cheshire

Wolcott

Allstate Insurance Co. (S)

$2,866

$2,314

$2,416

$2,314

Amica Mutual Insurance Co. (S)

$1,421

$1,313

$1,405

$1,313

General Accident Ins. Co. (S)

$2,191

$1,774

$1,844

$1,774

Government Employees Ins. (P)

$1,505

$1,311

$1,322

$1,311

Hartford Underwriters Insurance (S)

$2,508

$1,772

$2,218

$1,772

Liberty Mutual Fire (S)

$1,509

$1,185

$1,339

$1,185

Middlesex Mutual Assurance (S)

$1,668

$1,796

$1,370

$1,796

Nationwide Mutual Ins. Co. (P)

$1,580

$1,288

$1,391

$1,288

Peerless Insurance Co. (P)

$1,498

$1,210

$1,299

$1,210

Prudential Property and Casualty (P)

$1,448

$1,236

$1,486

$1,236

Phoenix Insurance Co. (P)

$1,880

$1,474

$1,830

$1,474

Travelers Indemnity Co. (S)

$2,340

$1,762

$2,260

$1,762


TERRITORIAL RATING MODIFICATIONS

Each of Connecticut's 169 towns are part of one of 18 rating territories. Rating territories are one of several classification factors automobile insurers use to determine an individual's premium. The purpose of rating territories is to form groups of drivers that have the same or similar exposure to loss or, stated another way, to form groups of drivers where the average size and number of claims per car are similar.

Five states, including Connecticut, have adopted rating territory modifications. In California, Proposition 103 establishes a driver's safety record, driving experience and annual mileage as the primary factors in determining auto insurance rates. Rating territories, along with some 15 other factors are “optional factors” that an insurer can also use in establishing rates. Proposition 103 appears to diminish the importance of territory but several consumer groups have filed lawsuits claiming that Insurance Commissioner Quachkenbush has allowed insurers to illegally base rates on ZIP codes.

In 1977, Connecticut Insurance Commissioner Mike ruled in response to a request for a declaratory judgment brought by the City of Hartford that insurers placed too much emphasis on loss costs within each territory as the primary basis for determining territorial base rates. In his view, reliance on territorial loss cost was unjustified because there was a lack of evidence as to whether the territories were homogenous, i.e., whether all of the drivers in a given territory represented the same or similar degrees of risk, and whether the size of each claim or number of claims per car were similar within a territory. He ruled that only 75% of a territory's base rate could be derived from that territory's loss experience; the remaining 25% had to be based on the statewide average loss experience. This practice continues today and applies to the calculation of all territorial base rates in Connecticut.

Michigan recently repealed restrictions on territorial rating that it enacted in 1981. Under a 1981 law, territorial rates were subject to the following restrictions: (1) each insurer's lowest territorial base rate could be no less than 45% of its highest rate, (2) rate differentials for adjacent territories could be no greater than 10%, and (3) no more than 20 territorial base rates could be used (House Bill 5177).

In 1983, New Jersey adopted premium rate caps in an attempt to hold down rates for urban drivers. The law required that rates could not exceed (1) two and one-half times the insurer's territorial base rate for each coverage and (2) for the base class in any territory 1.35 times the insurer's statewide average rate for each coverage (N.J.S.A. 17:29A-36). In May 1998, New Jersey repealed the caps when it enacted legislation to overhaul its automobile insurance law. Among the new law's requirements is the mandate that existing territorial boundaries be redrawn by January 1, 2000.

South Carolina's territorial modification consists of a requirement that no territory can be smaller than a county. South Carolina also requires the insurance commissioner to approve each insurer's territories (S.C.C. 38-77-122(B) and 38-77-124(A)).

ATTORNEY GENERAL'S REPORT

J. Robert Hunter, a consulting actuary and former Texas insurance commissioner, authored a report on behalf of Attorney General Blumenthal, analyzing rate levels and territory definitions in Connecticut. Hunter states that automobile insurance rates here are excessive and are particularly so for good drivers in urban areas. He cites high industry profits in 1996; which show the fifth highest profit margin in the country and are 40% higher than the national average. He calls for a 5.9% to 15% reduction.

Hunter suggests that Connecticut follow California by basing premium rates primarily on individual's driving records and experience and less on residential location. He also advocates increased consumer-buying power through the use of aggregation, competitive bidding, and group purchasing by city residents.

Finally, Hunter recommends that the Insurance Department hold a public hearing to obtain information from the 10 leading writers of automobile insurance in the state about the efficacy of competition vis--vis current rates and their comments on any anticipated rate action.

JH:lc

Enclosures: AG's Report

AIA Statement

Statistical Report