Home insurance premiums are an important part of one’s yearly expenditures. Most people have their homeowner’s policies paid through the mortgage holder; thus, paying the annual payment in small chucks each month through third party communication. This is a convenient plan, but buyer beware, it is important to monitor the policy premium for changes. Changes to the policy happen for a variety of reasons; however, the most common is the submission of a large claim.
Insurance serves a purpose. It protects financial investments by “insuring” replacement or compensation for loss. So, why is it that the insured is penalized for using the coverage when needed? The most important answer is that insurance agencies are big businesses in a capitalist market; their plan is to make money and minimize risk. The industry, regardless of the insurance company, uses an actuarial rate to determine risk, which in turn, determines the homeowner’s policy rate.
The actuarial rate changes following a claim for several reasons. First and foremost, it is important to note that the rate is used to protect the insurance company from any extraordinary loss (large fire, tornado, hurricane, broken pipe). In fact, some of the large home insurers will not issue policies in states known for regular hurricane or tornado loss. The individualized considerations of the actuarial rate are risk, expected value of future loss and predicted loss from historical information. Historically, the consideration is based homeowner claims or the unreasonable loss of the home’s region. All of this information is part of a formula that determines the amount of the policy premium.
We found these pictures at http://firewaterstrompros.com which are photos from the destruction caused by hurricane Sandy, which was estimated to be a $50 Billion dollar storm expense for insurnace carriers. This is a great example of how claims can impact future premiums.
Because this individual filed a large claim, the rate used for the new policy considers expected future loss at a higher rate. In addition, depending on the insurance company, this claim continues to raise the rate for approximately five to seven years. Ironically, a neighbor with the exact house could pay much less if the same neighbor never filed a claim. Although penalty for using purchased insurance many not seem reasonable, the consumer does not have an option if a mortgage is outstanding on the property.
In order to limit large claims, the policy holder should be more aware of preventative measures. Risk is one of the actuarial rate factors; thus, the consumer should investigate possible adjustments for risk. Large trees, for instance, should be a reasonable distance from the home and/or thinned-out so they do not break damaging the home. Unfortunately, not all risks can be avoided without moving to a different location. If the homeowner chooses to live in a high-risk area, it is only reasonable to expect higher premiums because of the expected value of future loss and predicted historical loss.
Regardless, knowing that policy premiums are determined by an actuary who uses a formula to establish the rate, helps the homeowner evaluate the risk and make the desired changes