Why is house insurance so expensive

When you buy a home and contents insurance policy, your insurer will consider a range of factors when calculating your monthly premium, including your circumstances, house value and more.

The factors outlined below can all affect your final home and contents premium.

The sum insured

The amount you will receive in the event of a claim on your home and contents insurance (minus any excess you owe) is commonly known as the ‘sum insured’.

Your sum insured amount should be sufficient enough to cover replacement or rebuilding costs for your home, otherwise you’ll risk underinsurance, which could leave you out of pocket.

If you don’t have adequate cover in place, your insurer may only pay part of your claim – which is why you should be insured for the correct amount.

Is the sum insured the same as the estimated value of my home?

Not necessarily. While the estimated value of your home should be a basis for your sum insured, there are a couple of things to consider.

Firstly, your sum insured amount doesn’t need to include your land value, as you will more than likely only need to replace your home, not the land it’s on.

For example, some properties in Sydney might be worth a couple of millions dollars, but the home itself may only be worth $500,000, so you’ll only need to insure it for $500,000.

Secondly, you should consider insuring your home for a sum insured amount that exceeds how much it would cost to rebuild or replace the property at present.

For example, in a very remote town, a home and land might be worth $300,000, but could cost $400,000 to fully replace.

Only insuring your home for its current value might disregard other rebuilding costs that you would have to pay out of pocket, or the potentially increased cost of building materials down the track.

Lastly, when you insure your home, you’ll need to calculate the replacement value of the whole structure and associated outbuildings as accurately as possible.

You’ll also need to do the same for the belongings in and around your home. If you own particularly precious items, you might consider taking out additional valuables cover.

Your excess

An excess refers to the sum you have to pay when you claim on your policy.

Most insurance policies will have a basic or standard excess which applies to every claim. Although, you’ll typically have the option to increase your excess amount, which will reduce your insurance premium.

Also, if you have home and contents insurance, your policy may have separate excesses for home claims and content claims; this means you can possibly increase or decrease either excess amount.

Although, because there may be a lower likelihood of making a claim on your home insurance, you may choose to increase your home insurance excess and potentially reduce your contents excess

Will I have to pay multiple excesses?

While a basic excess will apply whenever you make a claim, depending on the circumstances of your claim, you may have different applicable excesses to pay.

For example, if you’re claiming for an earthquake or flood, you may have to pay the higher of your basic excess or a fixed excess for a specific event. Or, if you’re claiming for an additional benefit (i.e. food spoilage), an additional excess may apply.

Your certificate of insurance or PDS usually lists the types of excess that you have to pay when you make a claim.

Most insurance policies provide enough insurance coverage to replace a destroyed property, an amount that gets adjusted every year to account for inflation. And it’s the replacement cost that is now driving up the cost of premiums.

The owner of the Plymouth home, who asked to not be identified, was hit with an increase in “replacement cost” even larger than his premium increase: 61 percent.

Another homeowner who shared her policy with me had an 8.6 percent increase in her premium (up $161) based in part on a 5 percent increase in replacement cost (up $30,000).

Some owners of homes and condos don’t bother reading their policies. And no wonder. They are not exactly consumer-friendly. The policies I reviewed do not highlight the percentage increases in premiums or in “limit of liability,” which is the term insurers use for replacement cost. (It is also sometimes referred to as your “coverage limit.”)

Here are some things you should know:

A. I don’t know for sure, but I certainly think so. The state Division of Insurance does not post rate increases online, but it did furnish me with the rate increases of half a dozen of the largest property insurers in the state, after I filed requests for them under the state public records law.

Those insurers boosted their rates by an average 2.65 percent. But that is only one factor in calculating premiums. Replacement cost is the other one. Your premium is determined by multiplying your insurer’s rate by your property’s estimated replacement cost. A rate increase, plus an increase in replacement cost, is a double whammy. Most policyholders are experiencing it when their policies become due for renewal.

A. The largest rate increase I found in my limited DOI data was Liberty Mutual, an average of 5 percent, with a maximum increase of 6.8 percent.

A spokesperson for Liberty Mutual attributed the increase to “significant inflationary pressures on labor and construction costs, and supply chain constraints that limit materials selection and increase repair/building times.”

The spokesperson said it was the first time since 2014 that Liberty Mutual requested and was approved a rate increase. (The other insurers in the sample most recently received rate increases last year or in 2020.)

After Liberty Mutual, the next largest increase in my sample was Safety Indemnity, an average of 3 percent, with a maximum increase of 11 percent.

Citation Insurance, a MAPFRE company, raised its rate by 2.6 percent, with a maximum increase of 10 percent, while Commerce, another MAPFRE company, raised its rate 2.2 percent, with a maximum increase of 8.6 percent.

MAPFRE is the state’s largest home insurer, with about $355 million in total premiums.

A. Safety Insurance raised its rate by 1.9 percent, with a maximum increase of 10 percent. Arbella raised its rate by 1.9 percent, with a maximum increase of 2.2 percent.

A. I don’t know. And as far as I can see, DOI does not have data on its website showing increases in replacement costs.

A. The insurers do. And they typically rely on companies hired to closely track building material and other costs that affect replacement costs.

The Liberty Mutual spokesperson put it this way: “Customers will likely see additional premium increases due to” replacement values “that automatically increase with inflation.”

A. Yes, you can argue you are being “over insured,” and possibly save a few bucks. But you need to be careful to avoid being “under insured,” meaning the amount you are insured for leaves you short in the event you need to replace your house at today’s prices. The Plymouth policyholder told me he contacted two of his insurer’s competitors for quotes on insuring his house. Both were higher, and he stayed with his longtime insurer.

A. On the “declarations” page, which is usually the first page. There are four categories listed that you want to pay attention to: “Dwelling,” which is your house; “other structures,” such as a detached garage, barn, or shed; “personal property,” which is your furniture and other contents of your home, and “loss of use,” which shows how much you are covered for when living in temporary housing while your damaged or destroyed house is worked on. A dollar amount is listed next to each category.

Your replacement cost value is the amount listed next to “dwelling,” under the heading “limit of liability.” Compare it to your previous year’s amount. The increase you see is the result of inflation.

A. Check your renewal against last year’s for changes in what’s called “endorsements,” which may add coverage for special categories. One policyholder showed me that her insurer charged her $77 for two special protection plans she didn’t ask for. If you find something you don’t want, tell your agent to delete it.

Also, check for increases in the cost of endorsements. You may consider them excessive. The same policyholder challenged a 24 percent increase in her earthquake coverage.

A. Pay attention to deductible amounts. If your deductible is increased from $500 to $1,000 for wind damage, for example, you are getting less insurance. And you want to make sure you know the difference between “actual cash value” versus “replacement cost.” You have less coverage under an “actual cash value” policy because it includes depreciation. The actual cash value of your 10-year-old roof, for example, is worth a lot less than a new one. Make sure you know what you are paying for.

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