How Are Home Insurance Prices Calculated?

To the average homeowner the workings of home insurance are a mystery, but there is a science behind the way home insurance rates are calculated. It is the job of the actuary to determine the total amount of premiums insurance companies must receive.

Actuaries work with the figures that represent the insurance company's expected losses, the cost of producing the insurance products, the company's cash reserves to manage a disaster and administrative and marketing costs.

The cost of the homeowner's premium is also set by the actuary. To arrive at the cost for an individual policyholder, several requirements are set for the insurance company and this is the information they use to decide the amount of a policy holders premium. Because each home insurance company uses a different set of requirements, your application may not be accepted by every insurer.

The amount of deductible you are willing to pay has a great impact on the level of your home insurance premium. Homeowners should be aware that insurance companies have become very strict about the number of claims a policyholder can make within a certain period of time. Your deductible can safeguard you from filing small claims that can endanger the renewal of your home insurance coverage.

If you live in a designated "high risk' area such as a location with a high crime rate, fire, flood or earthquake activity, these factors can all be the reasons why the premium of your home insurance policy will be costly: the closer you are to a fire station and fire hydrants the better.

Work through this checklist to get a better understanding of what factors will affect your home insurance price:

What is the amount of coverage you require? You can insure your home and personal possessions to varying degrees: the more property you insure, the higher you can expect the home insurance price to be.

What type of coverage do you want? There is a big difference between the HO-2 and HO-3 policy forms, purchasing a higher level of protection will cost more.

What will it cost to rebuild your home? The construction costs, materials used, the age of your home and the building codes all play a role in your home insurance price.

Will you want to receive replacement cost or actual cash value for your home if it needs to be rebuilt? Replacement costs will cover the price of rebuilding a home today, while actual cash value may not even come close.