Chapter 4:

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What factors go into determining the cost of an insurance premium?

Insurance companies determine the premium rates they charge, not insurance agents. Your agent can affect your rate by searching for the best carrier based on your situation and determining if you qualify for any discounts for various features your home may have.

It is important for homeowners to understand that they should not shop insurance based on price alone. When looking for a homeowner’s policy you need to make sure to get the type and level of coverage you need, at the most affordable price.

There are a multitude of factors that affect the premium rate a carrier charges, but it is typically determined by a combination of: the home’s proximity to the coast, its construction type, fire protection available, age of home, storm claim history and sometimes even the homeowner’s credit history.

The portion of the premium directly related to the history of storms in your area is based on hurricane models, which all insurance companies are required to follow. You may have never personally had any storm damage claims, but the insurance carrier does not base this rate on just your claim history alone, it is based on the history of all the homes in your area and the future potential for storm damage. A home located in or near a coastal area, especially an area with storm damage history, is probably going to be more expensive to insure than homes in areas not previously hit by storms.

Personal claim history can also be a factor, depending on the carrier. They will look to see if you have had a claim before, the type of claim, the amount that was paid out and how long it has been since your last claim.

Some companies will also do a check of your credit with what is considered a “soft-hit”. This type of inquiry will not affect your credit rating like applying for a loan or credit card will. If your credit is good, it may help you get a better rate from companies that are credit driven. In the past, companies felt that if you have a history of problems or showed a lack of responsibility, you may not take the best care of your property if something were to happen to it. This may not be as much of a factor as it was in the past, because there have been extenuating circumstances these last few years due to the financially turbulent economy we are experiencing.

All the factors that go into determining a premium primarily boil down to risk. The bottom line is the more risk a carrier feels you carry, the higher the premium they are going to charge you.

In Florida, especially its coastal regions, there are discounts available that can play a role in the final premium you will be charged. Chapter 8 discusses home inspections and the discounts your home may qualify for if it has certain features. These discounts are percentage based, using the dwelling value plus premium rate, so they will vary from client to client in the final dollar amount a policy may be discounted.

Cost is the biggest factor we hear, in how clients will approach deciding to look for a new homeowner’s policy. Again, we have to stress, the most important thing to consider when shopping a new policy is getting the coverage you need at an affordable price; don’t cut corners on coverage or just shop for the least expensive policy.

When all your leg work is complete and you are getting final quotes, it is important that you are comparing “apples to apples”. Always compare each coverage limit and if there is a question, make sure you obtain clarification and understand any and all differences. Policies can vary greatly in premium, coverages and limits.

Here is a short example of price/coverage comparisons:

Two families are transferred to Melbourne by their employer. These families are friends as well as co-workers and both are now looking for insurance for homes they are purchasing in the same area. While shopping insurance, they assumed they would end up finding their quotes being fairly close, as their situations and homes were almost identical.

However, both families were surprised when the first family’s quotes came in ranging from $1200-$4200 per year, while the second family’s quotes came in at $1800-$2700 per year. Both families were then quite skeptical and each made different decisions on how to go. One family decided to simply go with the lowest quote, saying they were only concerned with price and this policy would satisfy the lender.

The second family focused on coverage, they decided to investigate the policy differences further, rather than taking the cheapest quote. However, not being able to figure out the differences and what their impact was, they took the quotes to the agent they felt stood out to them because of her efficiency, accuracy and attention to detail during the quoting process. This agent had not given them the cheapest quote, but they felt confidant that she would best be able to best explain the differences.

Both families sat down with the agent and reviewed all the quotes they had obtained. During this process it became clear to them that the quotes varied greatly in the coverage each provided, which in turn directly affected the premium price. The first family had decided on the policy with the cheapest quote, which turned out to be a bare-bones, stripped down policy that had no coverage for replacing the screen enclosures around the pool (required for their area), high deductibles and a low replacement value on contents.

By the time they reviewed the policy the agent had originally offered the second family, they all had a good handle on what they were looking at in terms of the coverages provided. The policy offered to them was a far superior policy and the price was very reasonable at only $1,950 per year. It was not the cheapest policy, but it was clearly the policy that best fit their needs and gave them the most protection.

The second family felt in the event of a claim they were much more comfortable with the policy they obtained than the one their friends had paid for. They wouldn’t be responsible for replacing their screen enclosure around the pool and they didn’t have high out of pocket deductibles or have to replace items they lost at a much depreciated value.

Unfortunately for their friends, the policy differences will become very clear at their time of need. What saved them comparatively very little every month, will in the end cost them thousands of dollars.

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