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  • Writer's pictureDoron Yaniv

How Insurers Calculate Your Home Insurance Premium

Insurance involves the pooling of funds from many customers to pay for the losses that some customers may incur. The premium that is determined is based on the likelihood of how frequently events may happen. So how is home insurance determined? It's complicated. For insurance companies, there's a fine line between pricing competitively and losing money. Price too high, and they lose their customers to the competition. Price too low, and unexpected losses may leave them unable to pay claims -- and put them out of business.

For this reason, insurers continuously analyze their loss data (or pay companies called rating bureaus to collect and analyze data for them), determining which homeowner characteristics are most likely to result in claims, so they can price their products correctly.

Estimated Replacement Cost: The most important number to get right

The most important number and a piece of information when determining the cost of homeowners insurance is the estimated replacement cost of the home. The estimated replacement cost is the amount of money it would cost to build the same home where it stands now. This is different from the market value of the home, which includes other things such as the value of the plot of land. Every online quote calculator will ask you for this number.

What if you don’t know that number? That’s fine. Most people don’t, or they think they know but are mistaken. Some companies have a tool within their online quote calculator to help customers determine the estimated replacement cost of your home. Online tool or not, you should consider hiring an appraiser to visit your home and give an estimate. An appraisal is often required, and companies typically send their appraiser to estimate the replacement cost. Even if an insurance company sends an appraiser, it is still beneficial to have your independent estimate for comparison. Most appraisals cost between $200 and $400, or they can be as high as $500 or more, depending on how far the appraiser must travel to your property. Getting your assessment gives you a basis of comparison when your home insurance company comes back with their cost. Something to note when using the online calculators: Say you input $200,000 of replacement cost coverage needed into the calculator. When the calculator creates your quote and shows a breakdown of your coverage, you might notice the replacement cost covered might suddenly be greater than $200,000. The reason is the calculators automatically factor in estimated demolition and disposal costs as well as others you would incur if your home was destroyed and you needed to rebuild it.

Why is my homeowner's insurance so high?

Homeowners insurance premiums are determined by many factors, and insurers use proprietary software programs to calculate a home insurance rate increase (or decrease). How much does each factor contribute to your insurance cost? That's not something an insurer will tell you - how they manage their risk and pricing is a trade secret that even their own agents and brokers are not privy to.

Agents submit applicants' information to insurers; it's processed by underwriting software, which generates a rate. Furthermore, insurance pricing is very fluid and changes continuously. Carriers change their rates a lot to get business in different categories. One day, they want couples aged 50 with young drivers and another day they want single women under 30. The same is true with neighborhoods. The computer tries to balance the risk pool.

How to lower homeowners insurance costs?

Everyone wants to know how to reduce homeowners insurance premiums. There are several ways to save money on insurance - any insurance - and others that pertain only to homeowners coverage. First, try the same methods you'd use to save on auto insurance:

  • Ask how much you can lower your premium by raising your deductible. You won't want to make multiple small claims anyway, so paying for coverage you're unlikely to use isn't always the best use for your insurance dollars.

  • You will almost always pay less by buying more than one policy from a single insurer. This is called bundling. When you shop for coverage, shop all your coverage - auto, home, life, etc., and compare the bottom line price for everything.

  • Go through the factors listed in the section below with your agent, and see which ones you can improve, and how much of a discount you might get.

Next, look at these tips specific to homeowners insurance.

  • Consider making your home safer with a monitored security system (studies show that this can get you a 20 percent discount on your premium), motion-sensing lights, and upgraded locks, windows, and doors.

  • Don't insure for your home's purchase price if much of its value comes from the land. If the place burned down, you'd be rebuilding your structure and replacing landscaping - but the actual land does not need to be insured. If you have a home appraisal, it should list the value of the improvements - the things you'd have to pay to replace. That's a good starting point for determining the amount of coverage you require.

  • You can request a Comprehensive Loss Underwriting Exchange (C.L.U.E.) report for your property. If the cause of claims by the previous owner has not been resolved, your rates could be affected. If it has been determined, you can have the report corrected, saving you (and subsequent owners) on home insurance premiums. To fix an error, fill out the form on LexisNexis, the company that compiles C.L.U.E. data, or call them at 800-456-6004.

  • You should also request your personal C.L.U.E. report, which contains your personal claims history. Review it for errors - like a credit report, it may not be accurate, and fixable mistakes could be costing you.

  • Look into umbrella coverage for extra liability protection. It's relatively cheap (usually between $200 and $300 per year. As agents, we are told that umbrella policy holders are viewed as more responsible.

  • Finally, if you're willing to give up some information to your insurer, it may reward you. Similar to the "black boxes" some drivers install on their cars in exchange for lower car insurance premiums, "smart" home products including security cameras, thermostats, carbon monoxide, and fire detectors can net you 5 to 20 percent off some or all of your homeowner's insurance premium.

Homeowners insurance premiums are determined by many factors

As noted above, the way insurers weigh these factors when setting rates is ever-changing and a highly-guarded secret, but here are common factors that determine rates:

  • The replacement cost of the home (higher cost = higher rates)

  • Age of the house (newer homes can be cheaper to insure)

  • Home square footage (larger homes are more expensive to rebuild and have higher premiums)

  • Number of primary inhabitants (larger households increase potential liability)

  • Construction type (fire-safe materials like masonry are cheaper to insure than wood)

  • Roof type (fire-retardant asphalt or metal is preferable to wood shakes)

  • PPC (Public Protection Classification, which measures the proximity of fire station, police, hydrants, etc. A "1" is the best; a "10" is the worst.)

  • Area claim history (if neighbors file lots of claims, it can increase your rates)

  • Personal claim history (if you submit more than average claims, your rates will be higher)

  • Pets (dog with bite history or breeds considered more dangerous can increase rates)

  • Owner's credit score (statistics show that people with lower score file more insurance claims)

  • C.L.U.E. report of the property, which lists claims filed by the previous owners in addition to you. If the cause of the claims has not been resolved, your rates will be higher.

  • Security or alarm system (alarms and monitoring help decrease rates)

  • Fire alarm system

  • Deadbolt locks

  • Neighborhood crime rate (higher crime areas cause higher insurance rates)

  • Attractive nuisances (swimming pools, ponds, machinery, playground equipment, trampolines) increase liability potential and insurance premiums

If one or more of the factors listed here is costing you money and can't be changed (like your location), check with other insurers. A different company might not hate your Rottweiler or neighborhood at all, and you could pay less for your coverage.

How to save money on homeowners insurance

There are many things you can do to reduce your home's risk and lower your premiums. However, homeowners insurance costs vary widely among providers, and one of the best things you can do is to get multiple quotes from competing companies. Pricing changes all the time as insurers adjust their portfolios.

A good strategy is to call a local Independent Insurance Agency/Broker like All in One Insurance Group. They can shop over 30 insurance companies for you and provide you with the best rates without sacrificing coverage! “So Simple You Save!”

Insurers use different methods to set prices so it's important to shop around when looking for home insurance.

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