How Do Insurance Companies Determine Premium Costs

Have you ever wondered how insurance companies determine premium costs for home insurance? At the end of the day, it's all about minimizing their risk.

Getting a home insurance online quote can seem like gambling - a completely arbitrary process based on factors totally out of your control. However, this isn't the case. Insurance companies use a variety of factors to determine if you are a good candidate for home owner insurance, and then set their rates and policies accordingly.

In most cases, what insurance companies are trying to determine when they give you a home owner insurance quote is how much of a potential risk you are to file a major claim. After all, insurance companies make their money from people who pay their premiums month after month without filing a claim. These types of home insurance policies are moneymakers for insurance companies because they can collect a steady stream of income every month without having to write checks to cover the cost of claims filed against the policy.

People who posed lower risk of claims get cheap home insurance, while those who are greater risks have to pay more in order to cover the potential cost of claims being filed. This is why insurance companies have developed complex models to determine where individuals and families rank as risks.

For example, people with pets are additional risks because not only are the pets more of a risk to cause a major accident (like overturning a lit candle) but because of the risks of personal injury claims against the policy holder if they are injured by the animal. Smokers are also greater risks because of the potential for fires.

So before you apply for an insurance policy for your home, take at look at yourself and your home and see what could be considered a risk. If you can eliminate these potential problems, you could get a big reward in terms of lower premiums.

Alvin Michaels is a writer based in Pocatello Falls, Idaho who has written about the insurance industry for several major online news sites, newspapers and magazines.