Office of Legislative
Research
Research
Report
October 26, 2015
2015-R-0234
Connecticut General Assembly
Office of Legislative Research
Stephanie A. D'Ambrose, Director
Room 5300
Legislative Office Building
Hartford, CT 06106-1591
TERRITORIAL RATING IN AUTO INSURANCE
By: Alex Reger, Legislative Analyst II
ISSUE
Describe how auto insurers in Connecticut use territory
as a rating factor when determining risk and premiums
for private, non-fleet auto insurance (i.e., auto
insurance purchased for personal, noncommercial
use). Briefly compare Connecticut’s limits on territorial
ratings with those of other northeastern states, which
generally do not impose limits, and California, which
imposes significant limits. Discuss telematics as an
alternative to territorial rating.
SUMMARY
Insurers consider several factors when setting auto
insurance rates. One factor, called territorial rating, is
based on where an individual garages his or her
vehicle (typically the vehicle owner’s registered
address). Using this method, an insurer divides a state
into distinct geographical territories and sets rates
based on its aggregate loss experience in each territory. Loss experience,
sometimes called “loss-cost,” refers to the actual or expected cost to an insurer
from claims for cars garaged in the territory. The higher the loss experience in a
territory, the higher rate an insured may be expected to pay. In practice, this
means auto insurance rates correspond to the level of risk assigned to a vehicle’s
principal garaging location.
Connecticut law requires insurers using a territorial rating system to balance an
individual territory’s loss experience with the statewide loss experience. This means
that a total rate for a territory is calculated by combining 75% of the territory’s
loss-cost and 25% of the statewide lost-cost (CGS § 38a-686(b)(4)).
TERRITORIAL RATING
Many insurers use territorial
rating (i.e., where a car is
primarily garaged) as a
predictor of risk. As a result,
people who live and drive in
more populous areas, which
generally experience more
accidents, often pay more for
auto insurance.
Connecticut and Maine are the
only New England states to
require insurers to balance
local and statewide insurance
risks. This system, called a
weighted territorial system,
generally reduces auto
insurance costs in urban areas
and increases costs in
suburban and rural areas.
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2015-R-0234
Most northeastern states, including Massachusetts, New York, and Rhode Island,
allow insurers to use territorial ratings without requiring them to weigh both
territorial and statewide experience. At least one state, California, prohibits
territorial rating as a primary factor but allows it as a secondary factor.
One possible alternative to territorial rating is telematics, which is the use of driver-
specific data to more accurately assess risk. Telematics may be used in conjunction
with, or as an alternative to, territorial ratings.
AUTO INSURANCE RATES IN CONNECTICUT
Actuarial studies have shown that where a person garages his or her vehicle is a
major predictor of loss. For example, the Casualty Actuarial Society calls geography
“one of the primary drivers of claims experience” and “one of the most well-
established and widely used rating variables” (see page 188 of the linked report).
As a result, many insurers in Connecticut and other states use territorial ratings to
calculate a baseline loss experience.
This loss experience is then combined with other risk factors, including age;
gender; marital status; driving history; vehicle make and model; and in certain
circumstances, credit score, to produce a “pure premium.” A pure premium,
synonymous with loss-cost, is the amount an insurer would have to charge to cover
expected losses. (When loss-costs are discussed as a charge to an insured, they are
often referred to as pure premiums.)
The pure premium is then combined with non-risk factors, including policy bonuses
(e.g., a multi-policy discount for having multiple policies with the same insurer) and
the insurer’s profits and administrative costs, to arrive at the final premium charged
to an insured.
TERRITORIAL RATING IN CONNECTICUT
Connecticut law does not require the use of territorial ratings, but insurers that use
territorial ratings must mix territorial and statewide experience according to the
75%/25% statutory formula.
According to Connecticut Insurance Department officials, insurers’ use of territorial
ratings has gotten increasingly complex. For example, recent insurance filings from
several companies show a wide range of territories, often with unique factors for
bodily injury liability, property damage liability, medical expenses, and
uninsured/underinsured motorist coverages assigned to each. Insurers’ use of
territorial ratings, including how they draw territories and calculate loss experience
in each one, varies greatly from one insurer to the next.
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Calculating Territorial Loss-Costs
Insurers calculate loss-costs as a function of the value of all the losses assigned to
a territory. If a street divides two rating territories, an insurer must use the lower
rate.
According to the Insurance Department, insurers assign a loss to a territory based
on where a vehicle (or the “at-fault” vehicle in the case of an accident) is garaged
and not where an accident or loss occurs. For example, if a Mansfield resident was
at fault for an accident in Hartford, the loss experience is attributed to the Mansfield
territory.
Creating Territories
Territories are often associated with one or more ZIP codes, but Connecticut
regulations prohibit insurers from splitting a town or city into two or more
territories, regardless of how many ZIP codes it has (Conn. Agencies Regs. § 38a-
686-2). By law, insurers must file territories and associated ZIP codes with the
department, which must approve any change to the list (CGS § 38a-686(b)(3)).
Effect of Territorial Rating
In general, territorial ratings increase auto insurance rates in urban areas and
decrease them in suburban and rural areas. This is due to higher loss-costs
associated with factors like increased traffic density and accident rates in urban
areas. Higher loss-costs are generally associated with higher premiums.
Requiring a weighted system (like Connecticut’s) generally lowers rates in urban
areas when compared to an unweighted territorial rating system, as high loss-costs
in urban areas are kept down when combined with the lower statewide loss-cost.
Conversely, it increases insurance rates in suburban and rural areas with loss-costs
lower than the statewide average.
History and Recent Legislative Proposals
PA 10-7 codified the 75%/25% territorial rating requirement, which the Connecticut
Insurance Department previously set through administrative guidelines. Three bills
were introduced in the 2015 legislative session that would have changed how
territorial ratings are applied. None of the bills passed.
SB 238, as proposed, would have required insurers to use telematics data, when
available, instead of territorial data in determining auto insurance premiums. The
Insurance and Real Estate Committee reported a substitute bill that would have
required the Insurance Department to study telematics.
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HB 6163 would have changed the ratio to 50% territorial experience and 50%
statewide experience. HB 6866 would have prohibited territorial rating and required
insurers to use only an insured’s driving history, driving experience, and annual
miles driven as rating factors. According to the public hearing testimony on these
bills, proponents of territorial rating argue it (1) accurately reflects risk and (2)
benefits drivers by maintaining a competitive statewide market. Opponents of
territorial rating argue it (1) unfairly increases premiums on urban drivers and (2)
is unrelated to an insured’s driving record. Both bills died in committee.
TERRITORIAL RATING IN NEW ENGLAND AND NEW YORK
Massachusetts, New Hampshire, New York, Rhode Island, and Vermont all allow
insurers to use territorial ratings without requiring them to weigh or otherwise
balance territorial and statewide experience. Maine actuarially limits the effect of
territorial rating.
Massachusetts
According to the Division of Insurance, Massachusetts requires that the use of
territorial ratings be actuarially justified.
New Hampshire
According to a New Hampshire Insurance Department official, there are no
statutory or regulatory restrictions on territorial ratings, although all ratings must
still be actuarially justified.
New York
New York law allows insurers to consider “all factors reasonably attributed to a class
of risks” (N.Y. Ins. Law § 2304). We have contacted the New York Department of
Financial Services for clarification and will update this report if we receive a
response.
Rhode Island
According to the Rhode Island Department of Business Regulation (RI DBR), the
state does not require a weighted territorial formula. In practice, insurers use
territorial ratings to determine a base rate. However, Rhode Island prohibits
insurers from using territorial ratings as a credit or reduction to the base rate (RI
DBR Insurance Regulation 25).
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Vermont
Vermont insurance statutes do not specifically mention territorial ratings. We have
contacted officials at the Insurance Division of the Vermont Department of Financial
Regulation for further information, and will update this report if we receive more
information.
Maine
According to the Maine Bureau of Insurance, auto insurers use a credibility model
for territorial rating. In general, a credibility model reconciles a territory’s expected
and actual risk. Maine uses a credibility weight for the territory and its complement
weight for the state. (If a territorial rating is expressed as a decimal, the
complement is defined as 1-territorial rating.) It is not clear if this is a statutory or
regulatory requirement. We have contacted the bureau and will update this report if
we receive more information.
TERRITORIAL RATING IN CALIFORNIA
California significantly limits territorial rating. We briefly describe California’s
territorial rating rules and the effect of limiting territorial rating systems below.
California prohibits insurers from using territorial rating as the primary rating
method. In calculating risk, they must use three primary factors: the individual's
driving safety record, number of miles driven annually, and number of years of
driving experience. There are 16 optional secondary rating factors that an insurer
may also use to calculate premiums, two of which (claim frequency and severity)
are territorial components that reflect where the vehicle is garaged (Cal. Code.
Regs. Tit. 10 §2632.5). Other secondary factors include vehicle type and
performance capabilities, driver gender, and whether the driver completed a driving
training course. The secondary factors cannot be weighted as heavily as the
primary factors (Cal. Code. Regs. Tit. 10 §2632.8).
Proposition 103, adopted by California voters in 1988 (and fully enacted in
regulations in 2006), established the mandatory and secondary guidelines
described above. Prior to the enactment of Proposition 103, California insurers
weighed territorial ratings more heavily. In addition, Proposition 103 regulated
California insurers by requiring, among other things, rate increases to be approved
by the insurance commissioner.
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According to the California Department of Insurance, Proposition 103 “has saved
consumers billions.” However, it is unclear how much of the stated savings are due
to restrictions on territorial rating use or another element of Proposition 103, which
required premium increases be approved prior to use.
According to this report by ConsumerWatchdog.org, a national consumer advocacy
group, California insurance premiums decreased by almost 7% in the period from
1989-2004, while rates nationwide increased approximately 45%. The same report
notes the profitability of California insurance companies is higher than the national
average.
One possible effect of limiting territorial rating was that insurers may choose not to
write policies in the state. According to The Regulation of Automobile Insurance in
California, there is no evidence insurers exited California as a result of Proposition
103.
TELEMATICS AND TERRITORIAL RATINGS
Telematics (sometimes called usage-based insurance, or UBI) is the process by
which driving behavior is monitored through a small, in-car device (or an embedded
system such as OnStar), which captures data like speed, acceleration, mileage,
cornering, and stopping. The data is sent to the insurance company, which uses it
to more accurately assess an individual’s risk. As a result, safe drivers may be
rewarded with lower premiums. Telematics may be used in place of, or in
combination with, territorial ratings.
In Connecticut, at least one bill (SB 238) has been introduced to replace territorial
ratings with telematics. Nationally, telematics is often discussed as a growing
market. According to Pay
‐
as
‐
you
‐
Drive Auto Insurance in Massachusetts, a report
commissioned by the Conservation Law Foundation and the Environmental
Insurance Agency, telematics based on mileage “would improve fairness by shifting
weight in insurance pricing towards an individually controllable factor.” The report
suggests that using telematics to supplement territorial ratings most accurately
predict risk.
Progressive Insurance launched the first telematics device (called Snapshot) in the
United States in 1998. According to a National Association of Insurance
Commissioner’s (NAIC) report, at least Allstate, State Farm, and The Hartford also
offer telematics-based policies. According to NAIC, telematics policies represent
between 4% and 9% of the auto insurance market, and are expected to grow
significantly over the next several years. Progressive, for example, has
approximately $2 billion in telematics premiums from two million customers.
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Potential Issues
Telematics policies raise several issues, among them self-selection, “big data”
collection and analysis, customer uptake, and privacy and regulatory concerns.
Self-Selection. Telematics rewards safe drivers. As a result, more safe drivers
may self-select into telematics policies. This may create a riskier driver pool, with
higher premiums, for non-telematics policies.
Big Data. “Big data” refers generally to the collection of very large, and very
broad, data sets. It is not clear if insurers’ traditional assessment techniques are
applicable to such analysis.
Customer Uptake. According to a Deloitte Telematics Report, 47% of consumers
would need at least a 20% reduction in premium in order to install a telematics
device. It is not clear if telematics can provide the level of savings to offset
customer concerns like data collection and privacy.
Privacy. Many recent news articles express customer concerns about data
collection and privacy (including this one from Insurance Business, which details the
potential sale of data).
Regulation. As the telematics market grows, it is not clear if or how regulatory
officials will approach the new policies, or if they have statutory authority to do so.
According to a Connecticut Insurance Department official, Connecticut does not
currently have regulations specific to telematics policies.
RESOURCES
The following resources are listed in the order in which they appear in the report,
with the exception of statutory or regulatory citations, which are not listed below.
Casualty Actuarial Society, Basic Ratemaking,
http://www.casact.org/library/studynotes/Werner_Modlin_Ratemaking.pdf, last
visited October 16, 2015.
California Department of Insurance, Information Sheet: Proposition 103 Intervenor
Process, http://www.insurance.ca.gov/01-consumers/150-other-prog/01-
intervenor/info.cfm, last visited October 14, 2015.
Consumer Watchdog, Proposition 103’s Impact on Auto Insurance Premiums in
California, http://www.consumerwatchdog.org/resources/15years_Prop103.pdf, last
visited October 14, 2015.
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Dwight Jaffee and Thomas Russel, The Regulation of Automobile Insurance in
California, http://faculty.haas.berkeley.edu/jaffee/Papers/Auto2.pdf, last visited
October 14, 2015.
NAIC, Usage-Based Insurance and Telematics,
http://www.naic.org/cipr_topics/topic_usage_based_insurance.htm, last visited
October 20, 2015.
Joseph Ferreira, Jr. and Eric Minikel,Pay-As-You-Drive Auto Insurance in
Massachusetts, http://web.mit.edu/jf/www/payd/PAYD_CLF_Study_Nov2010.pdf,
last visited October 14, 2015.
Progressive, Snapshot, https://www.progressive.com/auto/snapshot/, last visited
October 14, 2015.
NAIC, Usage-Based Insurance and Vehicle Telematics: Insurance Market and
Regulatory Implications,
http://www.naic.org/documents/cipr_study_150324_usage_based_insurance_and_
vehicle_telematics_study_series.pdf, last visited October 14, 2015.
Deloitte, Telematics: Driving the Automobile Insurance Market Through Disruption,
http://irmka.scic.com/wp-
content/uploads/2012/10/US_FSI_TelematicsPOV_072412.pdf, last visited October
14, 2015.
Insurance Business, Major US Insurer Considers Selling Telematics Data,
http://www.insurancebusinessonline.com.au/news/major-us-insurer-considers-
selling-telematics-data-201175.aspx, last visited October 14, 2015.
AR:cmg
