Insurance Institute of Michigan
September 18, 2018

Key Issues : Urban Rates

Auto and Homeowners Rates in Urban Areas

Here in Michigan and throughout the United States, people in densely populated urban areas pay more for insurance because losses tend to be higher in urban areas.

For example, a Detroiter often pays twice as much to purchase the same auto insurance coverage for the same car, relative to an out-of-state resident. This rating system – which includes geographic location – as a factor in premium has been the target of critics for years.

Industry critics charge that auto insurance rates should be based on how someone drives, not where they live. They contend that it is unfair for someone in an urban area to pay higher rates than someone who lives near them, but in a different zip code.

However, insurance rates paid by urban motorists are neither arbitrary nor discriminatory. They are a true reflection of insurance pay out. The frequency and severity of insurance claims are generally higher in urban areas. So premiums must be higher.

Industry critics insist that auto coverage for big city motorists is often not “affordable.” In effect, they are encouraging insurers to reduce premiums to levels that would be inadequate for payment of claims and expenses. To do so would generate significant financial loss on policies sold in large metropolitan areas…and/or require subsidization by other policyholders in the state. Neither is a viable alternative.

A study of homeowners claims in eight major cities, including Detroit, found that homeowners insurance losses were 18 percent more frequent in the cities than in the adjacent areas (124 claims compared with 105). In addition, the average amount paid (claim severity) was 20 percent higher in the cities than in the surrounding communities with average claims at $3,155 in the cities and $2,619 outer areas.

The insurance industry is often charged with “redlining.” However, redlining, defined as refusal to issue or renew, or cancel an insurance policy based on the geographic location of the structure or individuals to be insured, is illegal and condemned by the insurance industry.

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