Back in "the day" an insurance agent could pretty accurately provide an estimate on how much a homeowners insurance policy would cost off the top of his or her head. Now computer programs make the process more complex as a lot more factors go into determining the premium. Understanding what some of these factors are however can help get a handle on what is paid and what can be done to lower the premium.
The top 6 factors that contribute to homeowners insurance premium:
1. Coverage amount: This should not be surprising as the more it costs to rebuild a home, the more expensive the policy. Unfortunately, there is not much that can be done about this figure as many insurance companies require that you insure your home to 100% of its replacement cost. Though the chance of any single homeowner having a total loss is slim, the companies want to be sure that there is enough money available for the large losses that will occur during any given year with all of their insureds. Most insurance companies have software available to agents that can be used to plug-in the details of a specific home and determine its replacement cost. This number is an estimate and if you strongly disagree with it, you would have to provide facts as to why, or get a second opinion from a professional appraiser. Keep in mind that the insurance replacement cost is different than the market value as market value includes your land as well as other factors like supply and demand.
2. Where your home is located: If you own a home that is on a dirt road and not visible to any neighbors the probability of a large loss, like fire, is greater than a home in a downtown area where there are hydrants and is highly visible. Insurance companies use a third party, the Insurance Services Office (ISO), which rates fire departments on a scale of 1 - 10 with 1 being the best. Every town is assigned a specific ISO number based on the fire department's response time as well as access to fire hydrants. The lower the number the better the premium and vice versa. There is not much you can personally do about a town's ISO rating, though the town of Milford was able to improve their ISO rating just last year, it is interesting to understand the factors in your rate.
3. Your insurance score: An insurance score uses information from your credit report in an attempt to predict how likely you are to file a claim. Insurance companies have data that supports the position that the way one handles credit can be a direct reflection on personal responsibility and hence likelihood of a claim. Every company weighs your insurance score differently but the impact can be huge with some companies discounting premium upwards of 30% for a great insurance score. Whether you agree with this or not, the NH Insurance Department has approved its use. If you are looking to reduce your premium, cleaning up your credit is a good place to start. For more information on how credit impacts premium, check out the HPM blog "What Does My Credit Have to do with What I Pay for Insurance?"
4. Claims history: This is a tough reality as the reason you buy insurance is to have a claim paid; however, if you file a claim your premium may increase or your policy may get cancelled altogether. Though I would love to say this is not true, it does happen. Here is why. Your premium may go up if your insurance company uses a "loss free" credit. Though this credit is fantastic to have when the policy is quoted, it hits the wallet when removed. Some companies even use a claim surcharge, so this surcharge on top of the loss of a credit can really add up.
You risk your policy being cancelled or non-renewed by an insurance company if you file more than one claim (paid or not) within a certain time frame (usually 3 -5 years). It is illegal for insurance companies writing in NH to cancel a policy with one claim in its history; but the NH Insurance Department does allow the cancellation if more than one. The reason is because insurance companies interrupt the frequency of claims as a red flag as someone who may not maintain his or her property or simply wants the money. Unfortunately, the reason for a claim may simply be just bad luck, so we encourage you to speak with your agent to see if anything can be done.
At HPM, we typically advise our clients that they should use their insurance if something has occurred that could not easily be paid for without insurance. We typically suggest that an estimate of damages be done before simply filing a claim. If you backed into your garage and caused $1200 in damage, but had a $1000 deductible, you would only be entitled to $200. Your premium may increase more than that with the loss of credits over the years. If you then had to file another claim within the next year or two, your policy may be in jeopardy of getting non-renewed. You certainly could then shop your insurance with other companies; however all companies factor in claims for rate and eligibility so claims do follow you.
That is not to imply that you should never file a claim, but making an informed decision about whether to do so or not is an important step in controlling your overall insurance costs.
5. Deductible: Given the information above, we typically suggest a higher deductible. The higher the deductible, the lower the premium; however check with your agent about the specifics of different deductible options. Some companies offer upwards of a $10,000 deductible, however the savings should warrant such a high deductible. If you are only saving $30 between a $1000 deductible vs. $5000, it may not worth it.
6. Alarms: It is a given that every home has a smoke detector, so most home policies automatically receive a 2% credit. Alarm credits typically range from 2 - 10% depending on what is installed. A central station alarm typically provides a 5% credit for fire and 5% for burglar (assuming you have both functions activated). You will need to submit a certificate verifying its installation. Over the years, we have heard a few clients say that the alarm company sales person told them that if they get an alarm, the premium decrease will pay for the alarm itself. We don't typically find this to be true,but you can always get a quote on the possible credit from your agent.
No one likes paying for insurance, but if you understand what contributes to the rate, and understand that some factors are within your control, you can be in more control of your premium, which is always a good thing.