The house price crash and its effects on home insurance
The house price crash has taken its toll on homeowners with many sinking into negative equity, which is when the money owed on a mortgage exceeds the value of the property. To make matters worse, there has been no reprieve with their home insurance premiums.
How have home insurance premiums reacted to the crash?
In October 2009, the AA’s British Insurance Premium Index reported that residential buildings insurance premiums had risen for the sixth successive quarter.
Over the course of the year, premiums on buildings insurance increased by 9.8 per cent to average £227 – its highest level since the Index began in 1994. Meanwhile, contents insurance rose by a comparatively small 1.8 per cent to average £125.
Why have premiums risen?
In terms of buildings insurance, average premiums have been affected by the house price crash and job losses within the construction industry. With many builders going out of business and others seeing their profit margins reduced drastically, the cost of labour and materials has risen meaning it is now more expensive for home insurance companies to cover the cost of repairs. In addition, because house prices have fallen, more homeowners are choosing to renovate their homes rather than sell. By adding extensions and other home improvements, the rebuild value of homes has increased.
Widespread unemployment has also taken its toll. When carrying out risk assessments, home insurers look at the employment status of the homeowner to assess the risk of defaulting on payments. With household budgets stretched, there is an increased risk that insurance premiums could be overlooked in favour of mortgage payments and other priorities.
Crucially, there are a number of additional factors that have affected buildings insurance premiums that are not related to the house price crash – these include a number of severe sporadic weather events and localised flooding.
When the recession first took hold many commentators believed contents insurance would rise dramatically due to increased theft and accidental damage claims. However, it is only recently that insurers have reported increased claims and so premiums for contents cover have not been affected significantly.
So how can homeowners reduce insurance costs?
Some property owners may have expected their home insurance premiums to go down as the market value of their property decreases but they are likely to be disappointed at renewal time. So in an effort to reduce premiums, homeowners should evaluate the level of cover they have in place.
Many homeowners mistakenly believe that a home should be insured to its market value – research by a comparison website in February 2009 revealed that 10 per cent of homeowners believe that the rebuild cost and market value are the same, while 20 per cent even thought the rebuild value should be higher. However, the market value takes into account the location, the land and other additional factors – where as the rebuild value assesses the cost of rebuilding a home if it were, for example, burnt down. As a result, the rebuild value should be below the retail value – you can assess the rebuild cost of your home with a rebuild calculator such as the Association of British Insurers’ sum insured calculator.
It’s important to assess the contents in your home too. Hold on to receipts and take photographs of new items that you bring into a home in case a claim is necessary and when calculating your home contents move from room to room and look beyond electrical items and furniture and also consider carpets, curtains, clothing and anything else that are not permanent fixtures and fittings.
Use a comparison website to compare prices on home insurance – the leading websites can compare policies from more than 50 insurers. Due to lower overheads, most home insurers sell their policies at a reduced rate online and you could pocket savings in the region of five-15 per cent.
There are several more ways to save on home insurance including:
- Increase security: Ask your insurer to recommend burglar alarms and other security devices such as time-switch lights and you could benefit from large savings.
- Join a Neighbourhood Watch scheme: Some insurers will cut contents premiums by around five per cent if you join a Neighbourhood Watch scheme.
- Prevent home fires: Fitting smoke alarms, fire extinguishers and even quitting smoking could help you reduce your home insurance premiums.
- Voluntary excess: The voluntary excess is the amount you agree to pay towards a claim in addition to the compulsory excess set by an insurer. Setting it a high level will reduce premiums – but be careful to only set it at a level you can afford if a claim is necessary.
- Pay premiums annually: You can avoid interest charges by paying premiums upfront instead of monthly.