Risk and Roads: The Data Behind Your Insurance Rates

When you open that auto insurance renewal notice and see your premium has increased yet again, what factors are actually driving that change? In this eye-opening conversation, Michel Leonard, Chief Economist and Data Scientist at the Insurance Information Institute (III), takes us behind the scenes of how insurance rates are determined.

Insurance might seem mysterious, but Leonard breaks down the actuarial science in refreshingly clear terms. As he explains, your rates aren't set arbitrarily, they're calculated based on statistical data that must prove the connection between risk factors and claims. The industry term is "actuarially sound," meaning any factor used to determine your premium must be demonstrably supported by data. And contrary to popular belief, having a red car doesn't automatically mean higher rates!

The conversation takes a fascinating turn when examining recent trends in auto insurance. Following COVID, an unexpected phenomenon occurred: people continued driving faster even as roads filled back up, leading to 2023 becoming the first year in three decades where overall driving safety deteriorated nationwide. Combined with supply chain disruptions that sent replacement costs soaring by 40% over three years, it's created the perfect storm for premium increases.

Leonard also offers insights into how modern vehicle technology impacts insurance. Today's vehicles incorporate sophisticated systems that, while making cars safer, also make them significantly more expensive to repair or replace. Something as simple as a headlight is now an integrated system rather than an easily replaceable bulb.

Whether you're curious about how telematics might change insurance pricing in the future, why insurance is regulated at the state level, or simply want to understand the factors affecting your own premium, this conversation provides the context you need to make sense of an essential financial product that touches all our lives.

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