How Risk Effects Homeowners Read the short article found at this linkhttp://www.

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How Risk Effects Homeowners

Read the short article found at this linkhttp://www.homeownersinsurance.org/how-risk-affects-your-homeowners-insurance-policy/

Annexation of townships, cities, and municipalities has come up a few times in Central Indiana in the last few years. In one such case some residents of Geist did not want to be annexed by Fishers. While their concerns were about taxes and property values, another consideration is insurance. Homeowners insurance can be effected by zip codes and their association with the zip codes of neighborhoods with higher crime rates, or incidences of property loss. Do you think this is a fair way to assess individuals risk level? Why/Why not?

Explanation / Answer

Without risk assessment, homeowners insurance companies stand a greater chance of insolvency that can also affect the policy holder. A more solvent company ensures greater claim security for the home owner. However, in the case of higher risk homeowners insurance policy holders, eminent insurer risk assessment may also be a disadvantage. Specifically premiums may be more reflective of actual risk, and not a potentially lower estimated risk.

Risk is factored into homeowners insurance by combining potential scenarios according to their probability, and determining how much insurance premium should be charged to account for the insured’s level of financial risk. In other words, variables like credit rating, smoking habits, home security, size of mortgage, and location can all factor into the homeowners insurance providers risk calculation.

Homeowners insurance companies don’t usually reveal their risk formulas, however several risk calculation models do exist. These models assist in determining how risk can be determined by insurance companies when calculating your insurance premium. A simple way of determining how much risk a homeowners insurance policy has is to assign a cost percent weight to each risk factor for a risk profile.

To illustrate the aforementioned homeowners insurance risk profiling, the example of Mr. Jones, a homeowner in Texas is used. If Mr. Jones wants a home insurance policy and one of his risk factors includes a roof that is not upgraded for tornado protection, the insurer may assign a 12% cost percent risk factor to that risk. He also owns a dangerous pet that the insurer considers a liability. Premiums are then calculated based on a percentage risk profile Mr. Jones has.

Many methods exist that explain how homeowners insurance companies calculate insurance risk. These may include classification systems, probability statistics, risk profiling or a combination of methods. Insurance companies may also consult with risk management firms to develop or test new ways of assessing homeowners insurance risk. The more accurate these formulas and techniques are, the greater the capacity of the homeowners insurance company to manage its costs.

Risk alone is not the only factor used to calculate the cost of homeowners insurance, but it is a big factor. Otherwise states such as Texas and Louisiana wouldn’t be ranked among the top 5 most expensive states to insure a home. Moreover, both these states are and have been exposed to severe natural hazards, and the consequent result was an increase in home insurance costs. By lowering risk through targeting your home’s highest risk factor, the potential to lower the insurance premium goes down. Contacting a local homeowners insurance provider and/or state department of insurance can assist with a risk audit of your home

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