How to End Zip Code Rate Evasion, Once and For All
Not all zip codes are created equal. When it comes to auto insurance, a customer’s home address makes a big splash in how much they pay for coverage. That’s no news to insurers, of course. Zip codes have played a starring role in rate calculations for decades.
However, in the Internet age of transparency, motivated customers can easily learn how their rates compare to others simply by using a rate comparison tool like the one that CarInsurance.com offers. They can also quickly determine if they’re living in a zip code-pricey city or not, as that information is also easily accessible. Living in the wrong zip code can drive up premiums by as much as 82 percent, transforming an annual bill of $730 to $4,217.
Transparency is a good thing … rate evasion is not
Let’s be honest: the system we’re talking about incentivizes cheating. For some customers, fudging the paperwork is much easier than paying thousands of dollars more than they feel is fair. Of course, it’s unethical to lie about one’s garaging address, but it’s not uncommon – and for insurers, it’s not cheap.
According to the Coalition Against Insurance Fraud, premium rating errors cost insurers 10 percent of the $161.7 billion in personal auto premiums written each year. The same website quotes a 2010 Quality Planning study that found that vehicle-garaging rating errors account for more than $2 billion in annual premium leakage, said Insurance Thought Leadership.
End zip code-based rate evasion with smartphone telematics
Rate evasion is notoriously hard to track. “Every hour, 25,608 vehicles are registered (including 6,402 new vehicles) and 3,453 Americans move to a new residence, according to the Quality Planning Corp report,” said NetQuote.com. “In addition, 52 percent of household auto insurance policies undergo vehicle or driver changes every year.”
Instead of requiring insurers to attempt the Herculean task of ferreting out fraud faster than it appears, smartphone telematics just makes zip code fraud impossible. With GPS data to verify a vehicle’s garaging address, misrepresenting the facts on paper simply isn’t an option.
It eases the pain that drivers feel, too. Smartphone telematics alleviates customer complaints about zip code-based premiums by setting their rates on how they behave: giving them the deal they’ve earned.
At the end of the day, true causal data will always be more accurate than proxy factors. Smartphone telematics empowers insurers to base premiums on data rather than predictions, helping insurers assess risk more accurately, while giving great drivers the rock-bottom premiums they deserve.
We think that’s slightly brilliant. Learn more ways that smartphone telematics can help insurers succeed by downloading our all new report, “How to Survive and Thrive in a Stagnant Auto Insurance Market.”