May 23, 2011

Why Zip Code Is An Important Factor In Car Insurance Quotes

The relationship of insurance premiums and zip codes is often questioned, but your automobile insurance rates are not set arbitrarily. This article explains why the area that a person lives in can be one of the important car insurance quote factors.

There are laws in place that prohibit insurers from cherry picking policyholders. They do not have the option to choose only the sweet ripe red cherries. They must also take the green driver and the sour old retiree; youthful inexperience and aging faculties cause many accidents. The laws do, however, allow insurance companies to sort the cherries, and that sorting process results in a hierarchy of pricing built as levels of risk. Policies are priced by weighing the risk of financial loss against the probability of financial gain.

Years of evolution of the insurance industry's process of data assimilation, assessment and sorting have spawned a statistical risk specialist, the actuary. Their "actuarial tables" revealed that insurance premiums and zip codes should have a relationship. They found that the readily available information about the size and population of an area proved to be consistently reliable factors in predicting the number of insurance claims, and the total dollars of those claims, within a given time frame.

The contributing factors behind the correlation of high risk to high population include the consequences common to any crowded place. People tend to bump into each other when it is crowded, whether walking through a sports stadium during an event or trying to drive out of the parking lot afterwards.

A higher concentration of drivers means denser traffic, which raises the probability of accidents. However, a denser population has the advantage of a larger tax base to provide better funding of road maintenance and emergency services. Those factors lower the incidence of accidents and increase the probability of survival, but rarely enough to balance the insurance claims common to areas of heavy traffic.

Insurance premiums and zip codes are linked because "population" is a strong indicator of risk. A good thing about fanatical risk assessment by insurers is that it spills over as fair play for policyholders due to the resultant lower rates for lower risks.

Please note the difference between the 'fair apportioning of rates' compared to the fairness of the 'base rate' that is being so even-handedly apportioned. For example, when Clark moved back to Smallville from Metropolis, Luthor Insurance Company reduced his rate by $20. This was in fair proportion to the reduction of risk achieved in the move; however, Luthor Insurance Company charges twice the amount of other companies. Always shop around, regardless of your "rate lowering" car insurance quote factors.