How is home insurance calculated?

October 15, 2022

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Home insurance premiums are a big expense and the factors that go into them can be complicated. So how is home insurance calculated? insurance companies use complex systems that analyze the risk of a claim.

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Insurers use loss data (claims paid in the past) along with construction cost data to see everything from the weather in a particular zip code to the cost of replacing a granite countertop. Publicly available home insurance calculators use similar, but often more simplified, approaches. In addition, the operating costs of the company are part of the formula.

Reading: How is the cost of homeowners insurance determined

Keep reading to learn more about the factors used to calculate home insurance costs and what you can do to lower your rates.

How are home insurance premiums calculated?

A home insurance calculator typically classifies policyholders by area and risk exposure (the level of risk they take). Here are the steps insurance companies use to calculate home insurance premiums:

1. find the pure prime

If an insurer wants to set its premium for a group of homeowners, it first divides the losses associated with that group by its exposure. if during the previous year the losses for properties valued at $100 million amounted to $500,000, that result would be 5% or five cents per dollar of property value, only to cover losses. this figure is called the “pure premium”.

2. calculate the expense ratio

The insurer then determines your administrative and other costs, such as commissions and taxes, and builds your desired profit. which is usually expressed as a percentage and is called the “expense rate”. 26.5% is the industry average according to s&p global.

3. set premium price

Insurance companies use a calculation of the pure premium and the expense ratio to obtain the gross premium. from there, that premium will be adjusted based on your personal factors.

what is the formula to calculate homeowners insurance yourself?

If you were confused when reading about how insurers calculate home insurance premiums, you’re not alone. however, there is a way to get your own quick estimate.

Multiplying the square footage of the home by the cost to rebuild is a quick way to determine how much homeowners coverage you’ll need. For example, let’s say your home is 2,000 square feet and the average construction cost per square foot is $150 (this cost will vary depending on your location, type of home, etc.) then 2,000 x $150 = $300,000 of home coverage .

Since we recommend insuring 100% of your rebuilding cost, enter that homeowners coverage number into our homeowners insurance calculator along with your ZIP code, liability coverage amount, and chosen deductible. then you will be given the average home insurance costs.

why is my home insurance premium so high?

Home insurance costs are determined by many factors and each company calculates them differently. that may explain why your rate is higher than your neighbor’s.

david meltzer of east insurance group in baltimore, maryland, says underwriting software is used to generate the rate. “We can defend policyholders when there is a claim, but the days of agents setting rates for clients are long gone.”

Also, insurance prices are very fluid and constantly changing, making it difficult to know what determines home insurance costs.

“The thing is insurance companies are aggressively trying to take business from other companies and are willing to cut prices to get the business,” Meltzer says. “keep their algorithms secret.”

That said, there are a few things that can contribute to high insurance rates:

a high risk of natural disasters
property hazards, such as a swimming pool
a history of home insurance claims
of high-end materials in the home

how to reduce homeowners insurance costs

There are several ways to save money on insurance (any type of insurance), including some that pertain only to homeowners coverage. First, try the same methods you would use to save on car insurance:

ask how much you can lower your premium by raising your deductible. You don’t want to make multiple small claims anyway, so paying for coverage you’re unlikely to use isn’t always the best use of your insurance money.
You may pay less if combine your coverage with one insurance company.
ask about discounts. There aren’t that many home insurance discounts, but some are pretty big.

Check out these tips specific to homeowners insurance below.

Consider making your home more secure with a monitored security system (studies show this can get you 20% off your premium), motion-sensing lights, and upgraded locks, windows, and doors .
do not insure for the purchase price of your home. if the house were to burn down, you’d be rebuilding its structure and replacing the landscaping, but you don’t need to insure the actual land. instead, insure your home for the estimated replacement cost.
Request a full Loss Underwriting Exchange (EcLU) report for your property. If the cause of the previous owner’s claims has not been resolved, your own rates could be affected. if it has been resolved, you can have the report corrected, saving you (and subsequent homeowners) on home insurance premiums. To correct an error, fill out the form at lexisnexis, the company that compiles c.l.u.e. data, or call them at 800-456-6004.
You must also request your personal c.l.u.e. report, which contains your personal claims history. check it for errors; Like a credit report, it may not be accurate, and repairable errors could cost you dearly.
Look for umbrella coverage for additional liability protection. It’s relatively cheap (typically $200 to $300 a year), and Meltzer says some insurers’ software is designed to offer lower rates to those with this coverage. “We’re told that general policyholders are seen as more responsible,” he says.
Finally, if you’re willing to give your insurer some information, they may reward you. Like the “black boxes” some drivers install in their cars in exchange for lower auto insurance premiums, “smart” home products like security cameras, thermostats, carbon monoxide, and fire detectors, they can get you up to 20% off some or all of your homeowners insurance premium.
look into home improvements to reduce insurance. Upgrading your roof or adding weather protection like storm shutters can lower your rates.

factors affecting homeowners insurance premiums

How is homeowners insurance calculated? As noted above, how insurers weigh these factors when setting rates is constantly changing and a closely guarded secret, but here are common factors that determine rates:

replacement cost of home (higher cost = higher rates)
age of home (newer homes may be cheaper to insure)
home square footage (larger homes are more expensive to rebuild and have higher premiums)
number of primary occupants (larger households increase potential liability)
type of construction (fireproof materials like masonry are cheaper to insure than wood)
type of roof (preferably asphalt or fireproof metal to wood shingles)
ppc ( public protection rating, which measures proximity to fire station, police station, fire hydrant, etc. a “1” is best, a “10” is worst.)
claim history of area (if neighbors file many claims, you can raise your rates)
personal claim history (if you file more claims than average, your rates will be higher)
pets (a dog with a history of biting or breeds considered more dangerous may increase rates)
owner’s credit score (statistics show that people with lower scores file more insurance claims)
c.l.u.e. property report, which lists claims filed by previous owners other than yourself. if the cause of the claims has not been resolved, your rates will be higher.
security or alarm system (alarms and monitoring help lower rates)
alarm system against fires
bolt locks
neighborhood crime rate (higher crime areas lead to higher insurance rates)
attractive nuisances (swimming pools, ponds, machinery, playground equipment, trampolines) increase the potential for liability and insurance premiums

If one or more of the factors listed here are costing you money and can’t be changed (like your location), check with other insurers. a different company may not rate your rottweiler or your neighborhood the same way, and you could pay less for your coverage.