(March 2022)
Homeowner coverage depends upon individual company rules and rates. While each company has its own rating methods, certain factors work toward shaping common rating schemes.
Note: The following is meant merely as a general discussion of factors that may be used in rating. Some states prohibit the use of certain criteria. Several factors that are commonly used in setting homeowner rates are:
· Structure Value
· Coverage Form
· Type of Construction
· Fire Protection Class
· Number of Family Units
· Miscellaneous
· Expenses and Fees
· Insurance Risk Score
It makes sense that the larger the value of the residence and other structures, the more costly the property coverage premium. Most of the increase is due directly to structure size and construction features such as superior materials, layout, amenities, etc. Since homeowner coverage limits are, typically, automatically tied to each other according to given percentages of the residence limit, the higher coverage amounts also influence premiums.
The broader the coverage as you go from HO 00 02 to form HO 00 05, the higher the premium charged. Of course, regardless the form, the rates all consist of the factors discussed below.
The typical types of construction found in this line of business include:
· Frame (includes aluminum or vinyl sided)
· Frame-stucco
· Brick-veneer
· Brick
· Stone
The lower a home’s susceptibility to loss, the lower its rate. Susceptibility assumes the level of vulnerability to fire or fire-related loss. Therefore, construction using fire resistive or non-combustible materials costs less to insure than a building that makes use of flammable construction.
Different communities receive different fire protection grades. A fire protection grade is composed of an evaluation of the following factors:
· The available water supply
· Competency of fire-fighting personnel
· Type and quality of fire fighting equipment
· Distance from fire department and response time
· Distance from fire hydrants
The lower the grade, the better the overall fire protection and, therefore, the lower the rate. The grades go from one to ten, though the lowest rate that is awarded for the best overall fire protection is two. All of the communities (or residence locations) that fall within a given grade make up a fire protection class. Homes and other structures with a grade 9 or 10 are, for all intents and purposes, unprotected and receive the highest rates.
Note: Some considerations are being made to create several more distinct classes rather than a large, single rating block for the first eight protection classes.
The number of living units within a residence may affect the rate that is charged for insurance. While this element once was more typical of rating under the Dwelling Policy program, current versions of the standard HO program now allow up to four living units in a residence. Of course, this is really a byproduct of structure size as more family units means larger structures. The other consideration is any accompanying landlord and tenant exposure.
Fire rates are modified by additional factors such as the chosen deductible (for property coverages), liability limits and/or other discounts and credits. Deductibles will reduce rates as their deductible size increases. Liability rates will increase as higher liability limits are chosen. Other discounts/credits may include allowances for the following:
· Builders risk coverage. The savings are due to the fact that the Coverage Limit of Insurance reflects the home’s completed value. For the earliest part of the policy term, the amount that is at risk to loss is considerably less than the final value. Therefore, a credit is usually applied to such policies.
· Superior construction type because better construction methods and materials mean less vulnerability to losses
· Central alarms/systems
· Longevity (retention)
· Multiple lines of business
· Loss free discount
· Large participating (percentage) deductibles
These are generally unique to an insurer but may include optional coverages or administrative fees. They are generally added to the rate developed after applying all factors to the company’s base rates.
Also known as credit or credit-based scores, it refers to an insurer’s consideration of an applicant’s credit score in charging a final premium. Different insurers file their own plans on how credit score information is used, but typical factors include:
Again, actual rating can vary by company, even in light of the conforming factors discussed earlier. Regardless of the method, a company must work from a base rate (consisting of loss costs and expense factors), generally developed on a per coverage basis. The base rate may be developed using a company’s own experience, using base loss cost information from an independent source, and modifying with company expenses or even (where laws permit) mimicking competition.
The base rate is used to develop a set of key premiums. Here is an example of steps that may be used to compute homeowner base premiums:
Step One, Develop Key Premiums
Homeowner Base Rate
x Territory Factor
x Fire Protection Class Factor
x Form Factor
x Type of Construction Factor
Results in a key premium
Step Two, Develop Base Premium
Key Premium
x Structure Value (per hundred or thousand)
Results in base premium
Step Three, Develop Final Premium
Base Premium
Apply Discounts (generally factors)
Apply Fees (generally dollar amounts)
* Results in Final Premium
* Note: Insurers differ in how they make premium adjustments based on the credit risk scores they develop for their customers and applicants; they may be applied as factors or as flat dollar amounts. Some carriers do NOT use credit information in rating but may restrict its use in underwriting.
An alternative rate plan is available through ISO and may be applied to all HO forms except HO 00 04 and HO 00 06. The Alternate Rating Plan is intended to provide more sophisticated rating. It adds the ability to develop rates on a per peril basis. In rating steps, reference to key premiums and factors are replaced by terms reflecting either an all peril or by-peril basis. Another enhancement under the plan is the ability to give rating consideration for a given area’s adequacy and enforcement of building codes. This is accomplished by making use of the alternate plan’s Building Code Effectiveness Grading rule.