Although you may not realize it, where you live has a great impact on your insurance rates. Certain zip codes are “red flagged” by insurance companies, and if you reside in that area, you could be in for steeper rates than your neighboring areas.

This may seem strange, but it is all based on risk assessment. Certain areas simply have more accidents than others. Often, this is due to traffic volume; places with more traffic have more accidents. Sometimes, however, the differences are more subtle and difficult to understand.

Risk is a calculation the company makes based on how many drivers whose description is close to yours have accidents annually. For example, a forty-five-year-old male with no previous accidents living in suburban Philadelphia or New York will be classed with other forty-five-year-old males in that area. The number of accidents these men have in one year will determine the risk for that pool of insurance applicants.

This means that risk rates affect your insurance premium rates. While your individual driving record is important, you are also classified with a group over which you have little to no control. This may seem unfair, but it is the way insurance companies are able to stabilize prices for everyone, no matter the groups to which they may belong.

Sometimes, the presence of large numbers of high-risk drivers may also increase your rates. This is because more high-risk drivers mean more likelihood that you will be involved in an accident, whether it is your fault or not.

For example, if an area has a high volume of younger or older drivers, rates may be increased. This is because these areas are statistically more likely to have accidents caused by these drivers. While this may seem odd to people living in this area, which may not have a huge volume of traffic, it is explained by statistical probability.

Similarly, when an area is close to a large city, it tends to have higher rates. This is because it is assumed that people living in this area travel into the city to work, shop, or engage in other activities. Ironically, some of these people in the suburbs may spend little time in the city; however, they still have the higher rates than those who live in suburbs located farther from the city center. In fact, people who live farther from the city and drive in to work every day may actually have lower rates than those who live closer to the city, even if they rarely visit the city itself.

While this may seem perplexing, it is important to remember that everyone in a particular zip code has the same problem. Higher rates apply to an area, and not to an individual. If your driving record is clean, if you are older than 25, and if you pay your insurance bill promptly, you will enjoy the lowest rates possible for your zip code.

It is not always certain that living close to a large city or in a certain zip code results in higher rates. If you take low-mileage insurance, your rates may decrease significantly. This is because low-mileage insurance is designed for people who do not drive very often. It is proof to the insurance company that your risk of an accident will be lower.

Another case where your rates may not rise is if your auto insurance company makes a distinction between driving to work and driving for pleasure. If your company is smaller and is located in the area in question, they might make a distinction between those who drive in a major city and those who remain in the suburbs. However, most companies follow the process of basing rates on zip codes, rather than making these distinctions.