How home insurance premiums are calculated

Insurance is based on some pretty basic principles: how often events occur (frequency) and how likely they are to occur (probability). And no matter whether you rent or own a house, cottage or condo, you need home insurance to protect your personal belongings.

If you already have a home insurance policy, you might be curious about how your insurer set your premium. And even though different insurance companies have different ways of setting prices, there are some similarities across the board. Keep reading to discover factors that affect your home insurance cost, how you can save money and why it’s important to have the right insurance coverage. 

A home insurance premium is the amount you pay to your insurer each year for an insurance policy to maintain coverage for your home (and what’s in it). The premium can be paid all in one shot, or divided into payments, depending on the conditions set out in your insurance policy.

Everyone’s insurance premium is different. A lot of things can change the price of your insurance: the coverage you pick, the features of your home, whether you own or rent, your deductible, your claims history, and more.

Some of the things that can affect your home insurance premiums are:

Home insurance rates are different depending on where you live. Do you live in the city or the country? Is your area newer? Is it a residential neighbourhood, or are there commercial buildings nearby? Being close to certain types of services can help lower your insurance costs. For example, a house in the countryside might be far from the nearest fire station, which could make your insurance more expensive.

Even your postal code can affect the cost of insurance! Insurance companies look at the claims history for each individual postal code to try and predict how much future claims might cost, and how likely they are to happen. For example, homes in areas with a greater risk of flooding or natural disasters usually have higher insurance premiums.

The same thing goes for a neighbourhood with a high crime rate, or even just a reputation for being unsafe. If there are a lot of thefts in your area, for example, it could affect your premium. 

Do you live in a new home? Is it a single-family house, an apartment or a condominium? The type of building you live in can affect the price of your insurance and the coverage you need for your personal property. For example, if you live in a multi-unit building, the size and number of units could affect your premium. And when it comes to building materials, since newer homes are usually built with modern construction materials and follow up-to-date building codes, you might be able to enjoy a lower premium if you live in a newer home.

The replacement cost is the amount you’d need to rebuild your house if it couldn’t be repaired after a loss. The cost to rebuild doesn’t include the land value. It isn’t the price you paid for your home, the market value or the property assessment value for tax purposes—it’s strictly the amount needed to rebuild. Your insurer can help you estimate this cost, but it’s up to you to make sure you have the right amount of coverage. If needed, you can get a professional appraisal of your property at your own expense.

The way your home is heated can affect your premium, with oil heating typically resulting in a higher premium than gas or electric. The reason for this is that there is a risk of a leak or spillage, and it can cost a lot to remediate and repair this type of damage. Homes heated by oil are also at a higher risk of fire than homes heated by natural gas or electric baseboard heat. If you have a wood-burning stove, your premium could also be higher, since it increases the risk of fire.

If you’ve turned your basement into an entertainment centre, with a game room or movie theatre, the replacement costs for all that expensive equipment can be very high. You’ll want to let your insurer know about your set-up so you’ll be adequately covered if you ever have to make a claim.

You may be able to reduce your premium by having a monitored home security system installed. Thieves and vandals often choose the path of least resistance, which means your chances of being robbed or vandalized go down if you have a visible camera. These types of systems can also alert you in case of fire or water damage. 

Your own claims history also plays a role in the calculation of your premium. Insurers consider past claims to be a good predictor of future ones. If you’ve submitted a lot of claims, your premium may be increased to offset this risk. But if you’ve gone many years without a claim, your premium could go down!

Basically, if you choose a higher deductible, you could be charged a lower premium. And if you choose a lower deductible, you could pay a higher premium. Your deductible is the amount you’ll have to pay before your insurance kicks in when you submit a claim. It’s up to you to find the sweet spot between saving money on your premiums and being able to pay for your out-of-pocket costs if you have to file a claim.

The price of your home insurance premium depends on the types of coverage you choose. Basic home insurance policies usually cover losses caused by:

• Fire
• Theft
• Certain types of water damage
• Extreme weather and natural disasters

Generally speaking, if you purchase additional coverage, your insurance costs will increase. To properly protect your personal belongings, you need to accurately assess their value. We’ll take a closer look at this later on.

The closer your home is to a fire hydrant and/or fire station, the better the chances that a fire could be put out sooner. This minimizes the potential damage and claims costs, so your insurance rates will typically be lower. 

Sometimes at renewal time, you’ll notice that your premium has increased. This can happen for a number of reasons, including:

Inflation affects the cost of everything, and insurance premiums are no exception. The cost of everything rises with inflation, including the labour and materials needed to repair and rebuild homes. Due to these increased costs, insurers have to raise premiums so they can continue to pay out claims when losses occur. 

Home insurance claims are on the rise due to an increase in extreme weather events and climate change. As a general rule, premiums tend to rise when insurers see more claims.

Natural disasters are happening more often and causing more damage, which is leading to more home insurance claims. This has a direct impact on insurance premiums. If things keep going the way they have been, we’ll be seeing more storms, tornadoes, wildfires, and floods, so this is something to keep in mind.

To make sure you have enough coverage, you should start by figuring out how much your personal belongings are worth and what kind of coverage you need. It might be a bit of a slog, but it’s the best way to make sure you’ve got enough insurance to cover everything you own.

Making a list of your possessions and keeping it up to date helps you protect your home and what’s in it. It’s really important to make an inventory, because it’s easy to underestimate what you own. The Insurance Bureau of Canada has a home inventory spreadsheet to help you. If you have any particularly valuable items, like art, collections or jewellery that are worth more than the maximum coverage amount, you might want to consider adding extra protection.

There are a lot of different ways you can save on insurance. One thing you might be able to do is bundle your home and auto insurance. This gets you the Multi-Line Discount, which could save you on your home insurance policy.¹ Plus, other discounts and savings may be available depending on your situation and the coverage options you choose.

Reviewing your coverage regularly (like once a year) is important to make sure it stays in line with your needs. A good time to do this is at renewal (it also makes it easy to remember!). Has anything changed that might affect your insurance? Have you finished any renos or put on an addition? Your home insurance should reflect the current value of your house and include any improvements, changes or big purchases you’ve made.

Your home insurance costs can vary widely depending on different factors. Since your home is likely to be your biggest purchase, it’s important to get the right coverage to protect your investment and avoid any nasty surprises. 

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[1] Discounts may vary, depending on where you live.