My home premium increased this year but I didn’t make any changes or have a claim. Why would my home insurance be more expensive this year?
Insurance companies are constantly reviewing their underwriting criteria and rates to better compete in the marketplace. They also make adjustments when the overall premiums collected are inadequate to pay those claims on an ongoing basis. A key principle in insurance is “The premium of the many, pay the claims of the few” so even if you haven’t filed a claim recently, your premium can still increase if overall claims and expenses exceed premium collected. This is our situation today.
How Does a Home Insurance Company determine my Premium?
Insurance companies use many different criteria to develop an individual premium. In home insurance (homeowner, tenant or condominium owner), insurance companies will consider:
- Building details: year of construction and construction materials, living area, etc.
- Maintenance of main systems: roof, plumbing, electrical and heating systems
- Values of the building (if homeowner) and contents
- Type of coverage and associated deductibles
- Past claims history and your credit score (where applicable)
- Trends: claims and cost trends (Emergency services, labour, material, overall repair and replacement costs)
- Other: special discounts such as mortgage free, non-smoker, multi-policy and other or special pricing specific to your personal information.
A Broker Perspective
As an insurance broker, we deal with many different insurance companies. We track the premiums charged and the claims paid. We base our observations on reviewing thousands of policies every year. Over the past several years we have witnessed a trend of increasing claims costs. Following are some observations:
- Water damage. Over the past five to ten years various types of water damage have impacted premiums due to increasing frequency and severity of claims. Coverage has become broader and premiums have increased significantly for water damage specifically because this. Water related damage is now the highest source of claims representing approximately 50% of all claims dollars. Most insurance policies now list some forms of water damage separately, illustrating the increasing importance (and cost) of the coverage. We prepared a specific Blog post and landing page to help customers understand the coverage.
- Insurance policies should keep pace with inflation so that at the time of a loss, your policy limits are as appropriate as when you first started insuring your home. Building values should keep step with residential construction cost indexes which track, labour and building material costs. The Consumer Price Index (CPI) is often cited as a measure of the increased costs in consumer goods, your contents limits should update to keep pace.
- Broader Coverage. Insurers offer more frills and new coverage to meet changing consumer needs. Flood coverage and Identity theft coverages are two examples of relatively new coverages added to address new claims potential in today’s world. These are good for you as a consumer but ultimately increase premium costs.
- Premium Coverages and Hidden Costs: Many Insurers have added special features to attract target clients, coverages like 2-year policies or 2-year premium guarantees and “Claims forgiveness”. These are interesting features when you look at your insurance pricing on a short term basis, they can save you money for a couple of years, but eventually when the term of the forgiveness or rate guarantee runs out, many clients are surprised to see sudden increases. As brokers we do our part to renegotiate when your renewal comes up, but at the end of the day if the insurance company rates go up across the board these features may come at a premium cost.
3 Things to Do to Save Money On Insurance When Rates Are Going Up
- Details matter. Update your broker on changes to your home and your personal information,
- For homeowners, review the reconstruction cost of your building to set the proper policy limit.
- Consider higher deductibles to lower premium.
The good news is that insurance is still a very competitive market and each insurer determines their own rates based on their unique formula in an attempt to win the business at the most reasonable prices. The bad news is that almost every insurer is increasing their rates for home insurance this year as they work to obtain a better balance between premiums collected and claims paid.