When you get your insurance bill in the mail or online, you may sometimes stop and wonder how exactly this rate was calculated. Did the company raise it on a whim? What changed that made it go down? Are there ways to save money, or is it out of my control? These are all valid questions when it comes to diving into your individual insurance rate. While it is different for everyone, there are common risk factors that every company considers when they calculate how much your insurance will cost.
So who sets the rates?
Insurance rates are established by individual insurance companies. The underwriting department primarily determines how these rates are calculated based on the risks that may be relevant. Depending on how high or low the exposure is, underwriters may raise or lower the cost to insure you or your property. Further, the Insurance Commissioner in every state helps set parameters and regulations surrounding insurance rates. In some cases, the Insurance Commissioner may pass new rules that force or encourage insurance companies to increase or lower rates. In short, there are many moving parts when looking at how insurance rates are set.
In general, what major factors affect insurance rates?
Insurance rates can vary based on the type of policy, such as car versus home insurance, though there are certain factors that apply regardless of what is being covered.
The biggest factor by far is past claims. It may not make sense to get “penalized” to use something you pay for, but the reality is that more claims often means greater risk. Insurance companies will account for this risk by raising the rates on policies that they have had to pay out money on. The reality is that if you don’t have claims, you are getting savings upfront for having a good claims history. You can think of it as being rated innocent until proven risky.
Location is another risk factor commonly used on insurance policies. Certain areas may be more prone to environmental hazards such as fires or floods, so these are taken into account with property-related policies. Additionally, cities and towns with higher rates of traffic will be considered higher risk than rural areas because of the increased chance of accidents on the road. Where you live can play a huge part in how much your insurance costs, so be sure to check with your agent when considering a move to a new zip code so you can prepare for any changes.
What special factors are used for car insurance?
One of the most impactful factors used in car insurance is a driver’s age. Statistically, young drivers are considered higher risk because they are inexperienced and newer on the road. They are the most likely to break the law, whether accidentally or on purpose. While your child may be a responsible, attentive, and aware driver, the insurance companies won’t be able to look past their young age when setting their rate. Once a driver turns 25, they can expect to see the rates slowly decline. On the flip side, elderly drivers often experience rate increases as they age since they are also considered a higher risk group. Despite their years and years of driving experience, they are prone to physical changes such as worsening vision, hearing, and reaction time. Even if senior drivers are in perfect health, they can anticipate a rate increase every 10 years once they reach age 70.
The year, make, and model of a car can also affect the cost to insure it. As you can imagine, insuring a 1990 Honda Civic is much cheaper than covering a brand-new Lamborghini (at least, in most cases). This is because of the cost to repair or replace the vehicle if it gets in an accident. Don’t assume that your vehicle will cost less to insure just because it is older or commonplace, though. Parts for certain cars may be more expensive or harder to come by, so even if it isn’t brand new you may find that it has a higher insurance rate. Additionally, you may be surprised to find newer vehicles sometimes come with a lower insurance price. As technology improves, so do safety features in vehicles. Newer cars often have these advantages over older cars, and with a better safety rating comes a better insurance rate.
What considerations are used specifically for home insurance?
Home insurance rates are determined based on a Replacement Cost Estimator. This allows insurance companies to determine how much it would cost to replace your home in the event it is completely destroyed. It is based on data about the materials used in your home, as well as square footage and other essential details. For example, a home with only 1,000 square feet and lower-quality materials will have a lower Reconstruction Cost than a 4,000 square foot home that has expensive wood floors, marble countertops, crown molding, and all the other desirable fixtures of luxury. In turn, a lower Reconstruction Cost often equates to a lower insurance rate since the home will cost less to rebuild.
Another factor with home insurance rates is safety. Houses with sprinkler systems, central alarms, and security cameras are considered lower risk than those without. While a home without these things may never be robbed or burned down, having these safeguards is additional protection against these hazards and therefore can lower your insurance cost. These can be great peace of mind not only for you, but for your insurance company, so it may be worth investing in these precautions to earn an additional discount on your policy.
Still unsure about your current insurance rate? Talk to Nicholson & Associates.
Insurance is complex, and there are many additional factors at play than the scope of this blog could hope to cover. Talk to a licensed insurance agent here at Nicolson & Associates to review your current insurance policy and determine what factors may be affecting your rate. As an independent brokerage, we have the unique ability to shop your insurance with different carriers and find you the best rate so you can always have options when your insurance goes up. Call today to see where we can help!
