Who Really Controls How Much You Pay for Insurance?

iStock_000000290735XSmallYou’ve probably heard a lot about how to save money on your home insurance by shopping around and doing what you can to appear as a good risk to the insurer. However, even with all those factors considered, the premium you are charged still depends on the insurance company’s underlying rates and how they apply to you. While the whole process might seem very arbitrary as a layperson, there’s actually a lot going on behind the scenes. In many instances, the rates are regulated by each state and that should also lend a bit of credibility to the premiums.

Insurance has traditionally been regulated by each state and not the federal government. As a result, insurance premiums, rates, and methodologies for the application of these charges can vary widely from state to state. When you are evaluating your insurance, it’s most important to isolate your review to the state in which the insurance is purchased and will apply. For example, if you are insuring a house in California, it’s largely irrelevant what your insurer is charging for houses in Arizona.

Within each state, the rating methodology may be somewhat different. Insurance companies need to file their rates with the state department of insurance, and oftentimes, the state will negotiate with or pressure the insurers to not raise rates. As a result of the influence of state regulators, your premium is not always purely a function of your personal claims history or viability as a risk to the insurance company. The degree of regulation required by states causes your insurance company to keep premiums within a certain boundary, both high and low. While this can benefit you by insulating you from outrageously high premiums, it can also have the negative effect of causing you to pay a little more than the rock-bottom prices you might otherwise be entitled to.

A good way to understand the cost of home insurance in your state is to check with your state’s department of insurance. The websites of each state are frequently filled with information about various insurance companies doing business in the state and the rates that they have filed for homeowners insurance. To find your state’s department of insurance, you can visit the National Association of Insurance Commissioners (NAIC) website, which has a great map that links you directly to your state’s resources.

Before you get upset at the fact that your rates are set somewhat out of your control, you should keep in mind that the underlying principle of insurance is of pooling risk. Therefore, it’s not realistic to always expect to have the absolute cheapest premium of anyone in your state. Inevitably, you will have a claim one day and the regulation in place protects you from having your premiums go through the roof the following year. This inability of insurance companies to wildly adjust your premiums is a great benefit derived from insurance regulation. The states will usually only allow a certain percentage of rate increase from one year to the next, shielding you from the uncertainty of great cost. After all, insurance is there to protect you from all sorts of uncertainties and insurance premiums themselves should be no different.

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