How Do Insurance Companies Determine My Homeowners Insurance Rate?
Have you ever received
your homeowners policy and thought to yourself, “How did they come up with that insurance rate?” You are not alone. While your home's value and the contents within in the home play a part in determining your rate and coverage amounts, there are other items that factor into what your premium amount will look like.
What are My Rate Based On?
Insurance premiums vary from state to state and from company to company. Each insurance company has it's own specific criteria when determining rates. So what's the biggest determining factor when it comes to rates for all insurance companies? One word – risk. If you are perceived to be “risky”, meaning you have the potential of filing several claims, your premium will be higher. A risky policy has the potential to put financial stain on an insurance company if multiple claims are filed and have to be paid out. Insurance companies determine risk by looking at your past history. The insurance company will look at frequency of claims submitted by you, the homeowner, claims directly related to your property and your credit. A big red flag is claim frequency and the severity of the claim, especially if there is more than one claim relating to the same issue. For example if you file multiple claims related to water damage then the insurance company can bet that more of these types of claims may be placed in the future and therefor you are a greater risk. While insurance companies are there to help you out and pay insurer claims, let's be honest, they also need to financially solvent. Insuring a home that has had multiple claims within a 7 year period, even if the a previous owner has made the claim, will knock your insurance premium into a higher tier. There is also a possibility you may not be eligible for homeowners insurance based on past recent claims.The Cause of Most Claims
The Insurance Information Institute (III) has done research and found that most claims are weather related. Wind and hail are the most frequent types of claims while fire, lightning and debris removal are the most expensive. The III also reports that roughly one in 20 insured homes will place a claim once a year while one in 30 insured homes have property damage related to wind and hail each year. They also find that water damage claims are very common. One in 55 homeowners will file a property damage claim caused by water damage and freezing each year.What Else Can Effect My Rate?
Some other factors insurance companies will look at are replacement cost of the home and accessibility to resources and labor in the event the home needs to be rebuilt. Other items like proximity to a fire station or a source of water to put out a fire; proximity to the coast; your homes relation to a high crime area or areas prone to wild fires will also factor into the premium amount. Rates can also increase if you have a pool, trampoline or own a dog. The condition or age of your home, whether your have a security system, type of heating systems (if an oil tank on the property is above ground or below ground), construction and roof type also play into determining your premium. A home that is not well maintained may increase the odds of a claim being filed and therefore rates will be higher. The other factor to take into consideration is any optional riders and deductibles you may have on your policy. For example any riders for wine, art, jewelry, etc. will change your annual policy premium.The Takeaway
Each insurance company has their own way of determining your annual insurance premium. It's important to remember that your credit score is one of the biggest factors followed closely by location to a fire station or water source, material the home is constructed of, your coverage amount and claim history. Insurance companies will weigh other factors but not as heavily as these listed above. As always, contact your insurance agent with any questions regarding your homeowner policy.
