Have you recently moved across state lines? You may have noticed that your insurance policy may have drastically different premiums even though nothing about your car or your coverage changed.
This is not uncommon and tends to perplex many insurance customers every year. There are many reasons for these discrepancies, and here we will seek to detail a few of the most common reasons:
Insurance commissioners regulate at the state level
The NAIC is the National Association of Insurance Commissioners, and though it is national organization, individual state insurance is regulated by commissioners at the state level.
This means that different states can have different requirements such as different minimum liability limits or may only be served by certain companies because not all companies may decide to pursue being licensed in a particular state.
Some states also have laws around what kind of business the insurance company can subscribe or reject, meaning that in some states insurance companies have less flexibility to fully manage their own risks. As a result of these regulatory differences, you can see significant differences in price between states.
Whose fault is it? – Difference between at fault and no fault states
One of the biggest differences between states is the fact that some states operate with “no-fault” laws, whereas other states operate under what are called \”at-fault\” laws. In the context of car insurance, this means that the risks insurance companies are assuming in these two kinds of states are very different. In no fault states, drivers can seek payment from their insurance company following an accident, regardless if they caused the incident or not. In an at fault state, parties must only seek payment from the responsible party’s insurance company. The intent of the no-fault laws are to reduce costs and undue burden on small-claims courts, but in effect it transfers these costs over to the insurance companies, resulting in generally higher premiums for customers in at fault states in today’s market. An unintended consequence of these laws has been that in states with no-fault laws, insurance companies have reported incread instances of attempts at fraud compared with states who do not have these laws.
In some extreme cases, such as in Florida, these insurance frauds have reached a level of sophistication where they have been linked to organized crime and have amounted to billions of dollars a year. Insurance fraud is a costly affair that mostly hurts law abiding and bill paying citizens, since the outcome of these fraud schemes is that insurance companies sustain more losses than they anticipated and as a result raise insurance premiums for everybody, including those who have never made a claim in their life.
The states which have no-fault laws as of April 2020 are:
Washington, Oregon, Texas, Utah, North Dakota, South Dakota, Arkansas, Kansas, Florida, Virginia, Kentucky, Vermont, New Hampshire, Massachussetts, Connecticut, Rhode Island, Hawaii, Minnesota, Wisconsin, Michigan, Maryland, Washington DC, Delaware, New Jersey and New York.
Note that while all the states above have some form of no fault law, all of them have slightly different laws. In some of the states above, having no fault auto insurance is mandatory, while in other states having this kind of auto insurance is optional.
Different states have different risks
It should be quite obvious that the risk a car faces in Florida or Texas are very different from the risks they face in Alaska or North Dakota. Some of the risks an auto insurance will cover you from are nature related; for example, snow storms are likely to cause accidents on the road whenever they occur.
Competition
We touched on the topic of regulation being different for every state briefly above, but this is a separate issue, and that is the supply and demand balance for insurance policies in each area. Some states are simply better served and have more competitive markets than other.
More remote and rural states are likely to have less insurance companies vying for business there; though, it must be noted that the effects this has on premiums could potentially be offset by factors such as the population density impact that we will cover later in this article.
Uninsured motorists
Another big difference between states are the number and proportion of uninsured and under insured motorists on the road. This represents a risk to the insurance companies because in the event that you get into an accident caused by a driver with no insurance, your own insurance company is going to have to cover the damages that the other driver caused.
Population density
Simply speaking, the more cars there are in a given amount of space, the more likely you are to get into an accident with one of those other cars. Insurance companies know this and charge more for insurance policies in densely populated areas. Not only are you more likely to be in an accident, but densely populated areas also tend to have a higher propensity of crime and a higher potential for insurance claims submitted.
Not all states have the same cars
Americans have different car preferences depending on the area of the country, and this in turn is reflected in the price of insurance premiums, as some cars are viewed as more expensive to insure than others. This difference is becoming even more notable as electric cars become more prominent across the nation. As these cars gain in popularity, they will become more prevalent in several key states before expanding across the country. Many insurance companies are somewhat weary and unsure of how to assess the risks of this new technology, and are charging higher premiums as a result of that.
The factors above are really only some of the reasons that insurance premiums can vary wildly from region to region even when on the surface one would think that the risk change does not merit the drastic price movements one sees. At the end of the day, insurance companies use proprietary and sophisticated underwriting algorithms that take into account hundreds of factors when determining a price. It is virtually impossible for consumers to fully reverse engineers these algorithms, but they can increase their chances of saving on their monthly premiums by following the general advice we provide here on Insurancebloginfo.