5 factors that affect homeowners insurance rates

By Susan Ladika Posted : 03/31/2014

Fire DepartmentThe more you know about how home insurers set their rates, the better chance you have of saving money. The key factors insurers use to assess your risk include the type and condition of your home, its location and your claims history, among others.

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Insurance companies assess risk in different ways, so it's important to compare homeowner insurance quotes to be sure you get the most affordable rate.

"It's about knowing your risk, and what you can do to minimize that risk," says Lynne McChristian, Florida representative for the Insurance Information Institute.

Here are five things that influence the rates you pay for your homeowners insurance.

1. Credit history: How the score your insurer uses differs from your credit score

In most states -- the exceptions being California, Maryland and Massachusetts – home insurers take into account your credit history. However, insurers use their own credit formula, called a credit-based insurance score, not the credit score lenders such as banks and credit companies use.

Here is a typical example of factors insurers review, and how those factors are weighted in a credit-based insurance score, according to the National Association of Insurance Commissioners:

  • Payment history -- 40 percent: How well you have made payments on your outstanding debt in the past.
  • Outstanding Debt -- 30 percent: How much debt you currently have.
  • Credit history length --15 percent: How long you have had a line of credit.
  • Pursuit of new credit -- 10 percent: How much you've recently applied for new credit.
  • Credit Mix -- 5 percent: The types of credit you have (credit card, mortgage, auto loans, etc.)

2. Proximity to a fire department

If you live in a remote rural area, rather than an urban area, your homeowners insurance rates are likely to be higher because of the limitations you'll face in fire protection.

The Insurance Services Office (ISO) provides information to the insurance industry about all kinds of risk, including the ability of your local fire department to offer protection in case your home catches on fire.

The ISO looks at things such as your home's distance from a fire station and from a fire hydrant. It also considers the capability of your local fire department, including the quality of its equipment and staffing, says Chris Hackett, director of personal lines policy at the Property Casualty Insurers Association of America.

Properties are rated from 1 to 10, with 1 being the best score a community can receive.

Many insurance companies use that information when setting rates, Hackett says. Urban and suburban communities tend to receive better ratings than isolated rural ones.

3. Your claims history

Even if you move to a newly built home, your claims history from your previous home could come back to haunt you.

If you've made homeowners insurance claims, your insurer may take those into account. "There's a significant correlation between claims that are made and future additional likelihood of claims being made," Hackett says.

Insurance companies often make use of the C.L.U.E. (Comprehensive Loss Underwriting Exchange) Personal Property report, which has information on the homeowners insurance claims you've filed in the past seven years.

The report contains information on the date of the loss, the type of loss, and the amount paid out to cover the claim.

Under the Fair Credit Reporting Act, you can request one free copy of your C.L.U.E. report each year. You can order your copy of the report online at or by phone at 1-866-312-8076.

The amount of the claim may be less important to your insurer than the reason for the claim, McChristian says.

If your claim was the result of an act of God, such as a tornado or lightning strike, regulations in many states prohibit an insurance company from taking that claim into consideration when setting your rates, Hackett says.

4. Your home's claims history

Your claims history isn't the only thing under the microscope when it comes to setting your homeowners insurance premium. Your home's history is, as well.

Your insurance company will check the C.L.U.E. report to see what claims have been filed for that particular home.

"Defects in a home, if known by the insurer, can cause rates to rise," says J. Robert Hunter, director of insurance for the Consumer Federation of America (CFA).

For example, if the house you've purchased has sustained water damage, your insurance rates may jump because of the potential for mold, Hunter says.

If you're in the market for a home, McChristian recommends that you check the C.L.U.E. report for the house you're considering purchasing, so you have an idea what you might be getting into.

Other than insurers, only the homeowner can request a report from C.L.U.E., so you'll have to ask the home's seller to obtain a copy for you.  

5. Construction and condition

Insurers also will take into consideration the construction and condition of your home. If you live in a frame house in a wildfire-prone area, you'll probably pay higher rates than someone who lives in a masonry home, Hackett says.

Of if you live in a home built in the 1920s with plaster walls, crown moldings and original hardwood floors, you'll likely pay more than someone in a new home because it's more costly to restore an older home to its original condition after a disaster, he says.

In some cases, you can mitigate your risk and reduce your rates by doing things such as installing hurricane shutters, getting a noncombustible roof or constructing a tornado shelter.

"If your insurance has gone up because your risk level has changed, it's sending you a signal," McChristian says.

And you should shop for insurance periodically, Hackett says. "Insurance companies have different appetites for risk."

 

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