How Are Home Insurance Rates Determined?

By Gina Roberts-Grey | Updated July 23, 2014 AAA
You home's value is one of the driving forces behind your home insurance premium and the amount of coverage you receive.

You home’s value is one of the driving forces behind your home insurance premium and the amount of coverage you receive.

But the value of your home and its contents aren’t the only – or the most significant – factor that dictates how much you’ll pay every year.

What are Rates Based On?

Home insurance premiums vary greatly by region and company. Every home insurance company uses its own specific criteria to determine rates. So what's the driving force behind rates?  According to Noah J. Bank, a licensed insurance broker and The B&G Group, Inc., in Plainview, NY, it's the likelihood a homeowner will file a claim - their perceived "risk."

A risky policy could place financial strain on a home insurance company if multiple claims are filed and paid out.

And to determine risk, home insurance companies give significant consideration to past home insurance claims submitted by the homeowner as well as claims related to that property and the homeowner’s credit.

“Claim frequency and severity of the claim play a considerable role is determining rates, especially if there's more than one claim relating to the same issue like water damage, wind storms, etc.,” says Bank. 

While insurers are there to pay claims, they're also in it to make money. Insuring a home that has had multiple claims in the past 3 to 7 years, even if a previous owner filed the claim, can bump your home insurance premium into a higher pricing tier. You may not even be eligible for home insurance based on the number of recent past claims filed, says Bank.

What Causes the Most Claims?

Past weather-related claims are a major culprit for driving up rates.

According to the Insurance Information Institute (III), homeowner insurance claims related to wind or hail are the most frequent type of claim. The most expensive types of home insurance claims are related to fire, lightning or debris removal.

The III also says roughly one in 20 insured homes have a claim once a year and about one in 30 insured homes have a property damage claim related to wind or hail each year. Water damage claims are also common; one in 55 homeowners files a property damage claim caused by water damage or freezing each year.

What Else Effects Rates?

Replacement cost and accessibility to resources and labor to rebuild are other major drivers of annual premiums, according to Banks. “How far a home is from the nearest fire station, fire hydrant or source of water for putting out fires; a home's proximity to the coast and its relation to high crime areas or wildfire prone areas are also just a few other pricing considerations.”

Neighborhood, crime rate, building material, etc. will all play a part in determining rates. And of course, coverage options like deductibles or added riders for art, wine, jewelry, etc., and coverage amount also factor into the size of an annual premium.

“Pricing and eligibility for home insurance can also vary depending on an insurer’s appetite for certain building construction, roof type, condition or age of the home, heating type (if an oil tank is on premise or underground), the proximity to the coast, if there are any pets, swimming pool, trampoline, security systems and more,” says Bank.

Depending on the breed, man’s best friend residing at your home can also raise your home insurance rates, says Billy Van Jura, owner, Birchyard LLC, an insurance planning firm and brokerage in Poughkeepsie, N.Y.

“The condition of your home could also reduce a home insurance company’s interest in providing coverage,” says Van Jura. “A home that’s not well-maintained increases the odds the insurer will pay on a claim for damage.”

The Bottom Line

Van Jura says although most home insurance companies each have their own unique rubric for determining home insurance premiums, the most important factor to consider is the homeowner's credit score. “Location of fire hydrant and fire station, material the home is made of (frame or masonry), amount of coverage and past claims are the next most important factors,” he says. Although they definitely contribute to annual premiums, Van Jura says other factors aren’t weighed as heavily by home insurance companies. 

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