The 3 Biggest Factors that Influence your Homeowners Insurance

There are many factors that influence your homeowners insurance rate;  however, some influence your rate much more than others.  From credit/insurance scores, to claim history, to your age – we’ll dissect which factors you should pay most attention to if you want to lower your homeowner insurance rate.

1. Location  – Yes, where your home is located affects your homeowners insurance rates.  And yes, it may play one of the largest roles in determining your rate. In determining how your location affects your rates – several factors come into play:

   1. How far away is your home from a fire department and fire hydrant?  Obviously, the closer you are to a water source and fire department, the quicker the response time will be in the event of a fire, and the lower the chance of a total loss occurring.

   2. Does your neighborhood have a history of frequent claims?  These factors may include how frequent break-ins are in your neighborhood to how likely a catastrophic weather event is.  Most insurance companies use zip codes when utilizing these factors.

   3. Is the surrounding area hazardous?  Homes surrounded by woods, brush, and other items may increase the likelihood of a loss and subsequently, may increase your rate.

Yes – location, location, location matters.

2. Home Characteristics – First and foremost, the characteristics of your home determine how much insurance you need to carry to replace/rebuild your home in the event of a total loss.  Unless written on a different form, most standard insurance companies require that homes insured on a homeowners insurance form (HO3 & HO5) be insured at 100% of replacement cost.  However, other factors may contribute to other your premium, such as:

   1. Age of home – typically, older homes will cost more to insure (especially those with older roofs) as they generally cost more to replace.  For individuals who own homes built before 1940, you may want to ask  your insurance agent about a functional replacement cost coverage.  This coverage rebuilds your homes with newer materials that are functionally the same as the older materials.

   2. Structure type – whether your home is brick or wooden-frame plays a role in the rating factor of your premium.  In the midwest, brick homes are usually less susceptible to normal losses (wind/hail) and subsequently, cost less to insure.

   3. Size of your home – Size does matter.  Larger homes obviously will cost more to replace and consequently, cost more to insure.  Additionally, larger garages are more likely to be broken into and usually hold a higher value of contents.  Higher risk = higher premiums.

3. Insurance/Loss History – As many homeowners find out the hard way, the more claims you file, the higher your insurance premiums become.  This may be true even if the loss was due to weather related activity.  Insurance companies usually use prior history to Insurance companies generally look at two factors when determining an insured’s loss history – loss frequency and loss severity.  If you frequently file small claims, your rates will be higher for two reasons:  1) Insurance companies deem you likely to file claims in the future (which costs them more money), and 2) smaller claims are usually preventable.

If you’ve had a severe loss in the last 3-5 years, many insurance companies will either choose not to insure your property or charge a higher premium as they deem you to be a higher risk client.

These are three of the main factors that actuaries use to determine your homeowners insurance premium.  There are several other actions you can take to lower your premium (like replacing a shingle roof with a metal  or hail resistant alternative).  As always, it’s best to discuss your risk and exposure with your insurance agent to determine the best way to customize your risk management program and potentially lower your premiums.