Massachusetts Lawmakers Consider Limiting Zip Code Weight in Auto Rates

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Massachusetts lawmakers are considering a measure that would curtail the use of geographical location in the rating of private passenger auto insurance, a factor that critics say now penalizes urban and minority drivers.

But the insurance industry says zip codes are among the most meaningful underwriting tools and keys to a competitive market in a state that already bans the use of gender and credit score in rating.

Senator Pavel M. Payano (D- First Essex) told fellow lawmakers on the Joint Committee on Financial Services that his legislation (S 703) could “go a long way towards making sure auto insurance prices are more equitable across the state.”

He said urban drivers are now “being gouged by insurance companies just because of their zip code.”

While insurers that use territorial rating can now use 100% of the loss costs within a zip code, the bill would require a 75%/25% weighting of territory to statewide loss cost experience. Thus an insurer’s base rate must give 75% weight to a zip code’s loss cost data and 25% weight to the statewide average loss cost data.

In his testimony on the bill, Payano said data from the state Merit Rating Board shows that communities with the highest percentage of people of color paid on average 90% more than drivers in less diverse zip codes. Also, drivers in urban and minority neighborhoods often pay 80% more than drivers in wealthier suburban neighborhoods, even if they are safe drivers without at-fault accidents on their record. Eve experienced drivers with excellent records in urban communities pay more than drivers in less diverse communities with a recent history of at-fault accidents or violations.

“These prices are not equitable or fair,” he said.

Michael DeLong, representing the Consumer Federation of America, backed the bill. He said his group’s research shows auto insurance premiums on average are $300 or 63% higher in urban and minority zip codes than in white suburban zip codes. He suggested making insurance more affordable in urban areas would reduce the number of uninsured motorists in the state.

Christopher Stark, executive director of the Massachusetts Insurance Federation, representing the state’s insurers, said his group strongly opposes the bill because it would “undermine underwriting freedom” that fuels consumer choice and competition. Stark called territory a “primary driver of claims experience and a well-established and widely used rating variable.”

“There’s a lot to balance in that from roadway safety and infrastructure investment in some of these areas, but when claims and exposures in certain areas are higher, the rates for those individuals are also going to be higher,” he said.

Frank O’Brien, of the American Property and Casualty Insurance Association, reminded lawmakers that the law already requires that auto rates not be unfairly discriminatory. He said territory is an “actuarially significant” rating factor that is made all the more important to maintaining a competitive market in Massachusetts since the state doesn’t allow the use of gender or credit scores in rating as most other states do. Higher losses in urban areas have a lot to do with congestion, road conditions, more accidents and other factors, he added.

O’Brien said the result of the 75%/25% framework would be to have suburban drivers subsidize urban drivers. He told lawmakers that whether the state should disallow or de-emphasize its use of territorial rating is a public policy decision for lawmakers.

The insurance industry representatives noted that Massachusetts does not have much of an uninsured motorist population compared to other states.

Payano modeled his bill on a law in Connecticut that implemented the 75%/25% rule on the use of loss costs in rating.


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