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Home Insurance Costs - Factors Affecting Insurance Premiums
Price is the primary buying consideration for the vast majority of people looking for a quote for home insurance. Despite the maturity of the UK insurance market, and the huge range of home insurance products available, the cost of home insurance can vary considerably. So what factors influence home insurance costs in the UK?
There are many competing underwriting factors that influence how much each policy should cost. For residential homeowners, the main factors that are built into the rating structures of most home insurance policies are; postcode, the type of building, the age of the building, its rebuilding cost and the age of the applicant. In general terms home insurance costs are usually weighted by these primary factors. Each one may vary according to different insurance companies business priorities.
For instance home insurance company A may want to grow its 'book of business' in rural areas, where it does not have a very good market presence (i.e very few 'risks on the books'. Whereas home insurance B may view they have already written too many policies, in a small cluster in a certain village or town. Consequently insurance company A may decide to reduce the cost cost of insurance based on certain postcodes, whereas insurance company B decides to increase their rates in those same postcodes. To balance one risk impacting a cluster of policyholders, all insurers' prefer to spread their risks geographically.
Likewise many insurers specialise in certain types of buildings or certain characteristics of potential policyholders. For instance some companies have created a niche property insurance policy, to cater for the insurance needs of owners of blocks of flats with flat roofs, or second home owners (whom may need to have their property left empty for long periods), and homeowners (who have experienced subsidence in the past). Broadly speaking the cost of home insurance is proportional to risk profile of certain building types and the chance of a risk occurring. The higher the risk the less the quantity of insurers that will offer policies in the market. So the home insurance costs for owners of non-standard buildings tends to be higher, when compared to an average residential policy.
Insurance works on a 'pooling system', everyone pays in to the pool so as that anyone unfortunate enough to suffer a loss is compensated. Insurers charge more for 'riskier' policies, (with a relatively stronger chance of claims occurring in the future), in order not to penalise other policyholders, (who own homes deemed to be 'less risky'). One of the most striking examples of this principle, is the pricing structures related to buildings located within a flood zone, (versus homes that are not in a designated flood zone and are not so likely to flood in future). So when constructing the overall cost of a policy, the actuarial departments of insurance companies never look at one risk in isolation - they will look at a 'pool of homogenous risks'.
One of the other major factors in the UK insurance industry which affects future home insurance costs, is the existence of massive claim payouts from previous years. Many UK homeowners will remember years when they experienced severe freezing winters and flooding in summertime. These caused huge damage and cost insurance companies millions in claims payouts. Regardless of the arguments for or against the existence of climate change - when extreme weather creates millions of pounds worth of home insurance claims - the cost of home insurance is highly likely to rise as a result in the future. Insurers can recoup their losses from bad years, using premiums accrued from relatively benign years or extreme weather. Current premiums are charged with a view to making sure their are adequate reserves to cover future losses.
Some of the larger home insurance companies are fighting an incredibly competitive battle against each other. As a result many 'special offers' aim to entice new business policyholders. For instance many homeowners are familiar with headline advertising such as '12 months for the price of 9' or 'x% off no claims discounts'. These mainstream offers are sometimes even offered on a ' loss leading' rationale. Despite the home insurance costs for the policyholder being competitive in year one, many insurers know that a large proportion of policyholders will continue renewing policies in future years. They also know that their ability to cross sell related financial products represents considerable sales upside. For instance most people who own a home, also own a car, and some will also own a pet. As the home insurer, already has large numbers of contact details in their databases, they can start to build up a profile of their customer base - creating hundreds of thousands of potential prospects to market too - at nominal cost.
Lastly the overheads of most larger insurers play a huge factor when determining the break even point for a policy. Many companies have huge claims processing functions, underwriting functions, and massive sales and marketing costs to recoup. These basic business functions must be built into the unit cost of each home insurance product created and sold.
