While chatting with a neighbour, you learned they pay less for their home insurance policy. You both use the same broker and insurance company, so why do you pay more?
This article will outline some of the different factors in determining your home insurance premium, and how to accurately compare two policies when shopping for insurance.
Note: Home insurance premiums are calculated based on both the physical risk as well as the insured. Both the home and the homeowner contribute to the premium calculation.
1. Replacement Cost
When you request a home insurance quote, your broker/agent will need to calculate the cost of rebuilding your home in the event of a loss. There are valuation programs which use your home's age, building materials, square footage, and other details to calculate the approximate cost of rebuilding your home with materials of like kind and quality. This number is used as the dwelling coverage amount (Coverage A) in your home insurance policy. Deliberately under-insuring your home could leave you subject to coinsurance clauses.
Note: The rebuild cost is not equal to the market value of your home. The insurance company is insuring the dwelling building, not the land, which contributes to a significant portion of the market value.
The replacement cost of the dwelling building makes up a bulk of the premium as this is usually one of the highest coverage limits on your home insurance policy and determines the limits for Coverages B-D. A home with a greater rebuild cost will generally cost more to insure.
2. Home Updates
There is a risk associated with different components of your home. Your roof, wiring, heating systems, and plumbing systems can impact your premium or eligibility for coverage. In general, insurance companies will offer credits for an updated roof or furnace, and are more likely to insure homes with up-to-date wiring and plumbing. These updates indicate that you care about your home, and take steps to reduce the impact of a potential claim.
There are also discounts for installing other loss prevention equipment such as water mitigation systems (i.e. sump pump) or monitored burglar alarms.
3. Coverages Included
While most insurance companies use standard policy wordings created by the Insurance Bureau of Canada (IBC), there are still a number of ways to customize your policy by adding optional coverages or increased limits.
For example, a basic home insurance policy with only fire coverage would cost less than a comprehensive policy with all of the optional water damage coverages, increased liability, and scheduled items such as jewelry included. It is impossible to accurately compare two policies without considering the coverage included, which is why we always recommend comparing policies with the help of a broker. Less expensive policies may seem more desirable, but what is the value of the coverage?
Similar to the point above, different policies may be subject to different deductibles. A deductible is the amount you would be responsible for paying in the event of a claim. Higher deductibles are associated with lower premiums. Again, it is important to evaluate the amount of risk you can retain when selecting deductibles.
5. Insurance & Claims History
You will get a better price on your home insurance if you have some habitational insurance history (i.e. renters, condo, etc.). A claims-free history gives the insurance company an idea of the type of risk you are, whereas someone with no history is an unknown risk.
Group, multi-policy, retiree, claims-free, and mortgage-free discounts might not be considered when comparing the bottom line of two policies. These discounts could make up to 25% of the difference you see.
Insurance companies perform soft credit checks on potential policyholders (your credit score is not impacted). If your credit is better than the average in your neighbourhood, you will get a discounted premium. If not, you will get the average for your neighbourhood.
Poor credit or other signs of financial trouble indicate a moral hazard to the insurance company. Statistically, you are more likely to commit insurance fraud (i.e. pad a claim) if you have poor credit. This factor alone could make up $1,000s a year in difference of premium.
Next time you compare two insurance policies for competitiveness, remember to keep these factors in mind. When in doubt, ask your broker!