Are home and auto insurance policies excessively priced in cities? : recent evidence from Michigan

Our study contributes to the growing literature on how insurance industry practices vary across space in ways that may unfairly penalize central cities. We utilize a unique, comprehensive database that allows us to examine the spatial patterns of premiums collected and claims paid out to policyholders for all home and auto insurance companies in Michigan during 2001-2002. As a result, we can test whether higher premiums typically charged in urban areas are justified by the higher claims losses incurred there. Territories that persistently evince low ratios of losses to premiums for a given policy type, all else equal, provide prima facie evidence of excessive premium-setting. We analyze three groups of homeowners' policies, delineated by the comprehensiveness of perils covered and the nature and level of compensation provided in case of loss, and three auto policy types - mandatory, collision, and comprehensive coverage. We find that both premiums and claims losses are higher in urban than suburban areas of Michigan, on average. However, the mean loss ratios for all segments of the home insurance market are not systematically lower in urban areas, even after a host of proxies for transactions costs are employed as controls. The same results appertain in the case of auto insurance across all but one policy type, comprehensive, where loss ratios are 16% lower in urban compared to suburban territories statewide, all else equal.