What makes my Homeowner’s Insurance go up?

You know, everyone asks why their insurance goes up in price and there is not a simple answer. Like most pricing issues there are several factors, and while some are in your control others are not.

The average price of gas at the pumps here in the Midwest is currently $2.64 and this time last year the average for the Midwest was $2.52. Why did it go up 12 cents in a year? The average cost for electricity in Indiana went up about a half cent per kilowatt of power in the last 12 months. Chocolate chip cookies cost an average of 5 cents more this July than they did in July of 2009. Cherries are up 77 cents a pound over their price last July.

In general there are some big reasons for the price increases listed above but in most cases … the price just went up. Homeowners insurance is just like any other product and as the cost of doing business raises the price offered to the public raises. But there are ways that you can control that increase or lessen its impact on your policy.

To begin with, it’s important to understand that homeowners insurance is a business and the only reason that companies get in to the business is to make money. That being said, homeowners insurance like all other insurance policies are contracts and the company is bound by the terms of the contract, and it is very much a one sided contract. The insurance company must provide the coverage that the policy dictates as long as the policy is in force. However, the customer can stop paying premium or cancel the contract anytime they want. So, what makes the company raise premiums? There are four basic events that increase the cost of your homeowners insurance.

First, if you have several claims in a three year period no matter what size those claims are you will see an increase in premium. Each claim, no matter how small has a fixed cost. The company has to pay someone to take the claim and enter it in the system, they have to pay another person to review the claim and determine if it is cover and what the liability is to the company. The amount paid to the client may be just a small portion of the overall cost to the company and so over time a client that has many small claims will be unprofitable.

Second, if you experience a single large loss you will see an increase in premium. If a client has a fire that causes say 20 thousand dollars in damages, and lets say they pay one thousand dollars a year in homeowners premium, the company may increase their premium by a couple hundred dollars a year for three to five years. This means the client will pay extra until the loss is old enough to be ignored then the client can request to be put back in a lower rate category.

Third, if an area that an insurance company has a lot of business in experiences a huge loss in a single year they will raise everyone’s premium to cover the losses in that area. Just like many companies involved in insuring homes in Florida during hurricane season lost a great deal of money rebuilding those homes, so they spread those loses on to clients around the country making everyone’s go up a little bit.

Finally, if the cost of labor, paper, postage or any other business expenses increases the cost of doing business to a point that it impacts the company’s bottom line, all their customers will receive an increase in premium. Just like at the local burger joint the cost of a burger now reflects the higher wages that the help gets paid and the increased cost of the beef used to make those burgers. My dad tells me about buying a burger for something like a nickel, you won’t see that price again just because the cost of materials and labor continues to go up.

So, what do you do if your premium goes up on your homeowner’s insurance? Well, first off realize that price increases happen and if you have had losses like what is described above you will be able to request to have your rate reevaluated after three to five years. If the increase was just an across the board increase do to rising cost of business, or losses elsewhere then everyone is getting those higher premiums and you should discuss with your agent ways to control your cost.

One way to control your premium is to raise the deductable. Your deductable is the amount of money you will pay out of pocket before the insurance company is responsible. As a general rule of thumb, the higher your deductable the lower the premium. Many folks who took out policies twenty years ago had $250 deductibles because that was a reasonable amount to pay out of pocket. Today, most home repairs cost three or four times what they cost in the late eighties, so your deductable should reflect that increase as well.

Nobody likes paying more for anything, but your agent can talk to you about what is the best strategy for controlling your premium while keeping you protected from total loss. Schedule a meeting with your agent and discuss what coverage you need as well as how you can best manage your asset protection. Communication with your agent will answer a lot of your questions and help you achieve the goals that you have for protecting your home and controlling your bills.

J