Home insurance can be described as a policy that provides you cover against damage done to your home, fires and thefts. The rates depend on the past experiences that the owner of the house and on what probability is there of the owner having any loss.

Home insurance providers assess risks based on particularized underwriting standards. Higher risks are the prime cause behind reduction in the value.  If there have been several occurrences of this nature, the company will either choose to hike up the rate of interest or reduce the cover amount. The insurance company benefits from your safety as it will prevent them from having to fill the claims in. Thus they follow certain factors for assessment to figure out how vulnerable a particular house or its owner is, to incurring a loss under the conditions against which the company is providing cover and the rates are made in accordance with the results.

Other factors for changes in rates are zip code safety ratings, type of construction or home, level of commercial activity that takes place under the same roof and the value of the home when compared to similar constructions in the same neighborhood. These factors enable the company to get a clear view of the chances off there being a loss and helps them in quoting a rate.

Hazards are yet another set of important factors. The 3 prime categories are physical/tangible hazards, moral hazards (the owners character) and morale hazards or hazards based on the persons indifference. For example, Owner1 rents out his house to tenants whereas Owner 2 resides in the house. Even if both houses are in the same area and are of the same type, Owner1 will be charged a higher rate for insurance as he has higher morale hazards and physical hazards as compared to Owner2. Since the tenants do not own the house, they might treat it with disregard which could potentially result in physical damage, theft or deterioration due to lack of maintenance.

A zip code assessment or census surveys the crime rate and amount of vandalism in that area.

Houses in areas which have higher crime rates are prone to be charged a higher premium compared to those houses that are in the outer suburbs. This is quite a controversial topic of discussion and had resulted in a group action lawsuit that took place in the late 1980’s in Milwaukee against the American Family Insurance Co. The lawsuit resulted in bringing about changes in this practice in a few minority areas in Milwaukee City.

The probability of a loss occurring gives rise to the rating factor. This factor can possibly be set with respect to experiences faced in a community and can be lowered if the insured owner asserts that his experience results in better ratings.

Insurance provides indemnity benefits to compensate a person with the value of what they’ve lost. An insured person who thinks that insurance is to be used for him to profit from or get a higher value for his property compared to the market value, has little or no knowledge on why insurance was important for him to buy. The idea of insurance is not to make you wealthier, but to prevent you from turning poor.  To give you something to relax your mind with, risk ratings show probability, experience and the occurrence of other quantifiable variables that can be tested statistically.