How Insurance Premiums Are Calculated

Insurance premiums aren’t random. They’re calculated using a risk formula that predicts how likely you are to file a claim—and how expensive that claim will be. Insurers do not care about fairness. They care about risk, cost, and whether your zip code loses them money.

If you want to see how premiums interact with policy structure, review policy limits before you start tweaking deductibles or coverage.

1. Rebuild Cost (Not Market Value)

The foundation of your premium is the cost to rebuild your home—not what you could sell it for. Market price is irrelevant. Construction cost is everything.

• Square footage
• Construction type
• Roof material
• Foundation type
• Local labor rates

If rebuild cost goes up, your premium goes up. This is why inflation protection raises coverage automatically.

2. Location Risk

Your address is one of the biggest premium drivers.

• Wildfire zones
• Hail-prone regions
• Wind/hurricane areas
• Flood-prone neighborhoods
• Crime rate for theft and vandalism

High-risk zip codes pay more even if your house has never been damaged.

3. Roof Age and Condition

Your roof is the most expensive part of your home to insure. Old or brittle roofs raise premiums instantly—or trigger coverage restrictions.

• 10–15 years old = higher premiums
• 15–20 years old = ACV roof coverage likely
• 20+ years old = insurer may refuse coverage entirely

If you see your roof downgraded to ACV, review ACV vs RCV so you understand the hit to payouts.

4. Deductibles

Deductibles heavily influence premiums—especially percentage deductibles for wind and hail.

• Higher deductible = lower premium
• Lower deductible = higher premium
• Percentage deductibles reduce premiums but increase risk

If you want to understand deductible math, review deductibles.

5. Your Claim History

Every claim stays on your record for years—sometimes up to seven.

• Water claims raise premiums the most
• Weather claims raise them moderately
• Theft claims raise them slightly

Multiple claims can trigger non-renewal, even if none were your fault.

6. Liability Risk

Trampolines, pools, dogs with bite histories, and poor property maintenance all increase liability risk—and premiums.

• High-risk breeds may be excluded entirely
• Unfenced pools raise premiums sharply
• Poor lighting or unsafe walkways increase liability exposure

Liability coverage is cheap—raise it. If you’re unsure where to set it, review liability coverage.

7. Fire Protection Score

Insurers score how well your area is protected from fire.

• Distance to the nearest fire station
• Distance to the nearest fire hydrant
• Local water supply quality
• Fire department rating

Poor scores mean higher premiums and fewer available insurers.

8. Credit-Based Insurance Score

In most states, insurers use a credit-based insurance score. This is not your credit score—but it’s closely related.

• Late payments hurt your score
• High utilization hurts your score
• Long credit history helps

Higher score = lower premium. It’s that simple.

9. Policy Structure and Endorsements

Every add-on or optional endorsement affects your premium.

• Sewer backup coverage
• Equipment breakdown coverage
• Scheduled personal property
• Ordinance and law coverage

Add-ons strengthen coverage—but they’re not free.

10. How to Lower Your Premium Without Weakening Coverage

• Increase your deductible (carefully)
• Improve your roof condition
• Add smoke detectors and security upgrades
• Bundle auto + home
• Shop around every few years
• Maintain a clean claim history

Cutting coverage to save money always backfires. Optimize—not weaken.