Hey, I’m not finished yet!
Gee, the Insurance Commissioner denies that his new mandate creates subsidies. There’s a surprise.
No, they’ve ruled that, by law, other factors must be given greater emphasis, whether they’re better predictors or not.
Why do you think State Farm wants to use zip codes if they aren’t a good predictor? Do you think they have a perverse desire to eschew profitable business in certain zip codes just because the customers’ skin is too dark for their taste?
Of course they are. I’m illustrating the possibility of location being a better predictor, not proving that it’s so. I don’t know State Farm’s costs by zip code and driver record, and neither do you.
I do know, however, that there are often dramatic differences between urban and rural auto loss costs. Among numbers in the public domain, a study in Michgan from 1983 to 1988 (at which time Michigan was experiencing an identical controversy over its Essential Insurance Act) found the following annual average loss cost differences between Detroit and the rest of the state:
Detroit Rest of State
Bodily Injury $33.77 $22.52
Personal Injury Protection $99.59 $56.74
Uninsured Motorist $12.41 $2.38
Collision $169.16 $116.41
Comprehensive $168.07 $55.24
Total $483.00 $253.29
So what about it? Neither one of us knows whether driver record or location is more important in California. But, the law says, an insurer must give greater weight to driver record.
If driver record really is more important, then all the law will accomplish will be to save misguided companies like State Farm from their own actuarial incompetence. State Farm’s profits will rise, since they’ll be pricing more in line with costs, and everybody will be happy.
If location really is more important, then the law will result in a severe overcharge for rural drivers with bad records, a subsidy for urban drivers with good records, and two effects moving in opposite directions for rural drivers with good records and urban drivers with bad records. The net result will be a rural-to-urban subsidy and a bad-record-to-good-record subsidy.
My money is on the second alternative, since I trust an insurance company–motivated only by profit–to make that determination more objectively than a politician responding to electoral pressure.
So, who feels sorry for rural drivers with bad records? Nobody. They’re bupkuses out in the sticks, who have been in accidents. Ergo, we can raise their rates, give everybody else a break, and everybody will be happy.
Except me. Because it’s unfair, damn it.
