Cost of Homeowners Insurance Not Tied to Your Claims
There seems to be much concern about homeowners insurance recently. It seems every company had to raise premiums and some tightened up their eligibility requirements. One of the most common questions people ask their agent is “Why do my homeowner rates keep going up when I haven’t had any claims?”
It’s important to understand how insurance works. The cost of claims is shared among all policyholders. Today, the average homeowners insurance premium is $487, while an average claim costs $3,024. No one pays for his or her own experience—everyone is helping to pay for those who file claims. Approximately one out of 10 homeowners file a claim each year. Even if you never file a claim, the millions of claims filed each year are driven up by increases in the cost of goods and services to repair and replace damaged homes. Federal statistics indicate the cost of home repairs is increasing by more than 7 percent per year—three times the overall rate of inflation.
Where do your premium dollars go? Insurance companies basically do three things with the premium dollars they receive: pay claims, pay operating expenses, and invest money to help build an emergency fund for unexpected losses. About 70 percent of the premium is used to pay claim costs; about 30 percent covers the operational costs to sell, service, and issue policies; and less than 1 percent is used to build the emergency fund.
Most insurance companies haven’t made money on homeowners insurance over the last 10 years. While rate levels remained relatively unchanged throughout the mid-1990s, homeowner insurers paid out $1.11 in claims and expenses for every dollar of premium they received. While the companies lost money on homeowners insurance, earnings from investments helped partially offset the difference. But a weakening stock market decreased investment revenue for insurance companies and private citizens alike, making additional rate adjustments necessary.
There are some things you can do to keep premiums under control:
It’s important to understand how insurance works. The cost of claims is shared among all policyholders. Today, the average homeowners insurance premium is $487, while an average claim costs $3,024. No one pays for his or her own experience—everyone is helping to pay for those who file claims. Approximately one out of 10 homeowners file a claim each year. Even if you never file a claim, the millions of claims filed each year are driven up by increases in the cost of goods and services to repair and replace damaged homes. Federal statistics indicate the cost of home repairs is increasing by more than 7 percent per year—three times the overall rate of inflation.
Where do your premium dollars go? Insurance companies basically do three things with the premium dollars they receive: pay claims, pay operating expenses, and invest money to help build an emergency fund for unexpected losses. About 70 percent of the premium is used to pay claim costs; about 30 percent covers the operational costs to sell, service, and issue policies; and less than 1 percent is used to build the emergency fund.
Most insurance companies haven’t made money on homeowners insurance over the last 10 years. While rate levels remained relatively unchanged throughout the mid-1990s, homeowner insurers paid out $1.11 in claims and expenses for every dollar of premium they received. While the companies lost money on homeowners insurance, earnings from investments helped partially offset the difference. But a weakening stock market decreased investment revenue for insurance companies and private citizens alike, making additional rate adjustments necessary.
There are some things you can do to keep premiums under control:
- Consider higher deductibles.
- Ask about available discounts. A discount is available for fire or security systems installed or if you renovated your home.
- Prevent home losses/damage—regular maintenance will make your home safer and less likely to suffer damage. TPW