AAA rethinks car insurance pricing by Zip code in California

The way that pricing is established for car insurance for California drivers may soon change. The American Automobile Association, the fourth largest insurer in the Golden State, has announced that they will no longer establish rates by Zip code. This change was mandated by California voters in 1988’s Proposition 103, but years of lawsuits have held up the implementation. To the best of our knowledge, AAA is the first major insurer to instigate the change. As the lawsuits work their way through the courts, more insurers will probably, voluntarily or otherwise, follow AAA’s lead in coming up with a more equitable system for pricing car insurance policies.

Insurer’s have long argued that establishing rates according to where the driver lives is necessary, saying that certain areas are more dangerous than others and that drivers that live in one particular neighborhood may be more likely to be in an accident or have their car stolen than a driver who lives elsewhere. Proponents of the change say that the only factors that should be considered are those of the driver alone - driving history, years of experience and previous accidents and claims.

It stands to reason that certain areas are more likely to have stolen cars than others, but drivers who live in those areas know that. Similarly, experienced drivers who live in areas where accidents are more likely to occur are also more likely to drive more carefully. No one chooses to get in an accident and no one chooses to have their car stolen. That being the case, basing rates upon a driver’s own history makes more sense than basing the rates strictly by geographical location.

Rates in California can vary widely depending on where the driver lives as rates in urban areas are substantially higher than less densely populated rural areas. Rates can vary by hundreds of dollars per year based on location alone. It seems that more likely factors would be such things as how many miles a driver puts on his or her car per year. The more time you spend on the road, the more likely you are to be in an accident. It hardly seems reasonable to ask a driver with a good record who has years of experience behind the wheel to pay more for insurance than a driver with less experience or a worse driving record who lives in a lesser populated area.

It does make sense for where a driver lives to have some bearing on the rates paid, but there is no reason why geography should be the primary factor in establishing rates. The American Automobile Association insured approximately one million people in California. One hopes that other companies will soon follow suit in establishing rates based on criteria over which the driver has some control, such as how they drive. In time, if the change is successful, perhaps insurers in other states will adopt the same formula.

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