When purchasing a product, cheap does not necessarily mean better. Value is in the details. Insurance is no exemption to this rule. People will often ask if we can offer cheaper insurance as their neighbour says they have home insurance that is cheape than theirs. Why would this be? Let’s dive into some reasons why it might be cheaper and why it might not be for the better.
Individualized rating – “Insurance designed for You!”
This is a new tactic that insurance companies are using to rate insurance competitively. They use a variety of metrics to determine a premium that is fitting to the customer and to the risk. Some factors that insurers use in their individualized rating system are:
- Year of dwelling
- Risk location
- Security system
- Age of occupant
- Credit score of occupant
- Claims history of occupant
- Claims history of dwelling/location
- Type of heating systems
- Upgrades to the Dwelling
- How many mortgages on property
- Type of construction
- How many stories is the dwelling
“Why do these metrics play a factor in the rating?”
Actuaries use these metrics to determine a appropriate rate for the policy risk. Let’s take a quick look at what these metrics look like:
- Year of dwelling – an older home with old wiring and plumbing have a greater chance of something failing.
- Risk location – a rural home on fire will have a lesser chance of being saved by a fire department; however, theft seems to be more common in urban areas. A house on a hill versus a home built near a river will have higher flood risks, therefore they will likely have a different water protection rating.
- Security system – Fire, Theft, Freezing and Flood sensors allow a quicker response to potential damages occuring.
- Age of occupant – Data shows that people who are older tend to have less claims.
- Credit score of occupant – similar to age, Data shows that people with higher credit tend to have less claims.
- Claims history of occupant – If people consistently claim on their insurance policy, a pattern might reflect that they are higher risk.
- Claims history of dwelling/location – If a property has a history of claims, it might be due to the location, flood mapping, city infrastructure or a variety of other reasons as to why that location might not be great to insure in.
- Type of heating systems – Oil or Wood heating systems tend to be higher risk and need to be rated differently or have additional underwriting or inspections required to write the policy.
- Upgrades to the Dwelling – upgraded furnace, electrical, plumbing or roof can help prevent future damage and will often lead to a better rating.
- How many mortgages on property – similar to the credit score rating, people with fewer or zero mortgages tend to make less claims.
- Type of construction – a building constructed of steel or concrete will have less risk than one constructed of wood or other combustibles.
- How many stories is the dwelling – a two storey home has more wind exposure than a one storey.
Some companies have not yet adopted the individualized rating and use a base rating for certain postal codes and then reduce the premium with discounts. Some of these discounts are universal and can be available on both rating systems.
- Deductible discount
This is a common discount available on almost any property policy. A deductible is the amount of any claim that you are responsible for. If you choose a $500 deductible, it means that you are responsible for any claim on your policy up to the first $500. After that the insurance company will start paying for the claim. If you raise this amount, you will be on the hook for a larger amount, but you will receive a discount because of that decision. Choosing a $750, $1000, $2500, or $5000 option will give you increased savings the higher you go.
- Monitored Alarm System
If you have a monitored alarm system installed (Vivint, Fluent, Liberty, etc.) you will likely save a decent amount on your home insurance.
- Preventative Measures Discount
Installing an automatic sump pump and inline backup water valve to prevent sewer backups can help reduce the premium for water protection and sewer backup coverage.
- New Home Discount
Some companies offer a reduced rate for homes that are 15 years old and newer.
- Loyalty Discount – long-term clients who remain loyal to an insurance company will earn a discount for years of continued business. Being loyal also has benefits in the event a claim does occur as the insurance company will want to make sure their loyal customers are taken care of.
Other ways to cheapen your policy
Some insurance markets will offer you a cheaper policy to get your business in the door. While this method may save you money, it may not be in your best interest. You will want to make sure you fully understand the coverage, deductibles, limits and other important information that they might be tweaking to save you money. Here are some items they might look at adjusting.
This amount can be misinterpreted if you are not careful. Some companies will offer your “Guaranteed Replacement Cost (GRC),” where some will simply offer “Replacement Cost” and some will offer “Actual Cash Value (ACV).” These variations will have significant impact on the payout and financial recovery of your claim, if you are unfortunate enough to have one.
If you choose to insure for $400,000 GRC, your coverage will be dramatically better than someone who chooses to insure their home for $150,000 ACV.
When you have your limit of your dwelling, you will now be given options of coverage on your home. Typically there are 3 levels of coverage.
- Named Perils
- Broad Form
Based on the package you select (or they quote you), the price will be substantially different as the coverage is much different.
Named Perils coverage is for basic perils, such as: Fire, Lightning, Windstorm, Hail, Vandalism, Riot, Water Escape / Rupture, Smoke, Impact by Vehicle/Aircraft – to name a few.
Comprehensive coverage covers your home and belongings from any direct physical loss or damage, except a list of exclusions. If it is not excluded, it is covered.
Broad Form covers your home with comprehensive coverage and your belongings with Named Perils coverage. Typically theft is included in this package for your belongings.
Every company will offer additional coverages to help better the protection of your home while offering a competitive advantage against other insurance companies. Some of these include:
- Reduced Glass Deductible Coverage
- Legal Expense Coverage
- Identity Theft Coverage
- Volunteer FireFighting Coverage
- Water Protection – Sewer Backup & Flooding
- Bylaws Coverage
- Home Systems Protection
- Service Line Coverage
These endorsements are sometimes included in the policy automatically or sometimes they have an additional cost to the policy.
To get an apples-to-apples quote these days is almost impossible. That is why it is important to make sure you have a thorough understanding of your policy details. Talking to one of our brokers on Live Chat, telephone or by emailing us with any questions you may have, could be extremely beneficial to understanding your coverage.
What you will find is that people at “coffee row,” or friends of yours, might sway you into thinking that you can buy an identical policy, much cheaper, somewhere else. “My home policy is way less than that, and I have the exact same coverage.” First of all, I doubt he has read your policy and his policy and completed a comparable analysis. But in the case that this is true, it is likely due to one of the metrics we noted above that could explain the difference in premium. If the metrics are the same and the premium is still different, it might be due to the fact that they have sacrificed better coverage to save a buck. This is why you need to speak with an insurance professional you trust, who can give you sound advice on the coverage you have and the price you are paying.
The insurance industry has evolved over the last decade. This is because of the overwhelming amount of data we are collecting on a daily basis. Our job is to collect that data and provide our clients with a product that is competitive and offers peace of mind when a claim arises. Be sure you understand your policy and chat with your broker if you need further clarification on an issue. Those conversations are extremely important when it comes to having the right coverage that best suits your needs.