Wisconsin Zip Code Ban Could be Insurers’ Bane

On Wednesday, February 20th, representatives of the American Insurance Association (AIA) testified against a Wisconsin bill (SB 348) that would ban the use of zip codes as a rating factor when setting insurance premiums. Their statement was that the bill is unfair, and that it hides the real cost of insurance.

According to AIA’s assistant vice president for their Midwest Region, John Birkinbine, “Wisconsin consumers enjoy some of the nation’s lowest rates for insurance and eliminating a proven rate factor like zip code could have negative repercussions in what is a stable, healthy market.” He also said that the proposed bill is unfair and impractical because, “SB 348 prevents an insurer from localizing and more accurately placing the cost of insurance where it should be – where the claims are.”

Birkinbine is part of an industry panel which stands against SB 348 before the Wisconsin Senate Committee on Health, Human Services, Insurance, and Job Creation. The bill would establish a new insurance rating system of state-permitted factors, but would exclude zip codes from those factors. There are almost 900 zip codes in Wisconsin alone and more than 46,000 across the country. If the Wisconsin bill is passed, it could set a trend for the rest of the nation.

Proponents of the bill say that the use of zip codes to rate insurance targets minorities and people in certain economic classes, and is therefore discriminatory, while the AIA says that studies show that areas with denser populations have more claims and more accidents, citing a 2006 report by the Highway Loss Data Institute that showed the number of collision and PIP claims to be 39 percent higher than the average in the densest zip codes as compared to the least populated ones. Property damage claims frequencies, similarly, were 32 percent higher in the same areas.

Birkinbine adds, “Ignoring a driver’s location does not reduce the likelihood a claim will be filed, it simply transfers the cost of that claim across the pool of all insured drivers, resulting in significantly higher premiums for good drivers in rural and ex-urban areas in order to subsidize drivers in higher risk major cities, such as Milwaukee.”