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How Is Home Insurance Premium Calculated in the UK?

Written by, Marija Petkova

Updated November, 14, 2022

Understanding home insurance premiums can be tricky as there are several factors that determine how much you will need to pay to insure your property.

So, how is a home insurance premium calculated and what exactly goes into the cost of your home insurance policy?

Keep on reading to find out.

How Much Does House Insurance Cost?

According to the Association of British Insurers (ABI), combined home insurance cost an average of £299 in the second quarter of 2022, down by 7% from the same quarter in the previous year. Buildings insurance was an average of £228 and contents insurance cost an average of £116, both of which decreased by 10% compared to Q2 2021.

That said, these are average figures—home insurance companies in the UK use several factors to calculate the cost of each customer’s individual premium. 

How Is a Home Insurance Premium Calculated?

Before we get into the formula for calculating homeowners insurance, you need to understand how insurance works. 

When you take out an insurance policy, you and every other customer pay into a central pot which is then used to settle claims and cover other ongoing expenses. If more claims are being made at once, such as an entire area being hit by floods or extreme weather, the insurer will need more funds to cover the cost, which results in higher prices for everyone.

In addition to external factors, like the weather, insurers also look at your individual circumstances when calculating house insurance, including the type of home you own, its age and location. 

Below you will find a list of the major factors influencing home insurance costs.

Individual factors used to calculate home insurance cost

  • Location

One of the biggest deciding factors in a house insurance estimate is the location. Insurers use public data on your local area to set a price that is unique for you. This data includes anything from the average crime rate in the neighbourhood to the likelihood of flooding or proximity to a fire station. 

Normally, residents of urban areas and more affluent neighbourhoods have higher premiums. Thus the cost of combined insurance in London, where several suburbs have high crime rates, is an average of £205, whereas the cost of insurance in the southwest (where some cities like Devon have a crime rate of just 8.3 per 1,000 people) is £140. 

  • Type of build

Another factor that comes into play when calculating home insurance is the type of built. For instance, semi-detached homes might cost more to insure as the risk of subsidence is greater than with terraced houses. The same applies to older properties, as many of them use copper water pipes or other material that is easily damaged. Wooden features, such as timber frames, or thatched roofs, can also increase your insurance premium since they are a fire risk. 

As a rule of thumb, if your home has non-standard materials, the premium will be higher

The size of the home is also important. In general, the bigger the home, the more it will cost to insure, especially if you have more than two bathrooms. Water leaks are one of the most common insurance claims, so more bathrooms means more pipes which in turn means more chances of water leaks. 

Note: if you are upgrading to a bigger house, you need to let your insurer know as this will definitely affect the cost of your premium. 

  • Past claims

Typically every time you make a claim, your premium increases. So, when taking out home insurance or renewing your policy, the insurance company will look at your claims history in the past five years and work out a price for you. 

  • Any changes you make

Changes to make to your home, such as adding an extension, your policy (removing or adding items) or your family (arrival of a new baby or your children moving out) will affect the way your home insurance is calculated.

Other individual factors include your lifestyle (whether you smoke or not, have children), the value of your belongings (if you are taking out contents insurance or a combined cover) and whether or not your home is occupied.

External factors used to calculate home insurance

  • Weather 

Storms, high winds, prolonged rain, and freezing temperatures can cause various problems in a house, such as leaking roofs and burst pipes. What’s more, an increasing number of areas are becoming vulnerable to flooding as a result of climate change.

The rising number of homes affected by severe weather and floods means that your insurer must prepare for future weather-related claims, which in turn increases everyone’s premium. 

  • Number and type of claims

It’s not just your claims history that drives home insurance premiums up. A huge chunk of insurance companies’ funds is used to settle customer claims. In other words, if more people make claims on their home insurance, the insurer will have to raise premiums to pay out the claims. 

  • The rising cost of repairs 

The cost of repairs also impacts home insurance premiums. In essence, the more it costs to replace a device or repair damages to homes, the higher premiums will be for everyone. In fact, one of the reasons behind the rising costs of insurance is new and emerging technology—modern devices and appliances are costlier and more complex to fix or replace, so the cost of insurance policies is higher. 

The same is true for building and repair expenses—as the price of materials and labour goes up (especially during periods of high inflation), so do insurance premiums. 

  • Tax

Each policy includes Insurance Premium Tax (IPT), a charge all insurers are required to pay the government. The current rate of IPT is 12%. 

  • Fraud

Although most insurers have dedicated counter-fraud technicians, insurance fraud is still a serious issue in the UK that affects innocent policyholders the most. Actually, it is estimated that insurance fraud ends up costing the policyholder around £50 every year in higher premiums. 

  • New FCA regulations

As of January 2022, when existing customers renew a car insurance policy or home insurance cover they will pay the same or lower premium than a new customer. Although this makes it fair for those renewing policies, this regulation means that insurance premiums will go up across the industry.

What goes into your home insurance premium? 

Here is what your premium is made up of

  • More than half of your premium is used to cover claims
  • 10.7% goes into IPT
  • Around 20% goes towards ongoing costs such as running offices, online and customer support, and employee salaries. 
  • Government schemes, like Flood Re, and other charges across the industry account for 10 to 15% of your premium. 
  • A small percentage remains as profit for the insurance company. 

How Much Home Insurance Do I Need?

How much home insurance you will need depends on the type of homeowners insurance you are taking out, i.e. whether you are opting for buildings-only, contents-only or combined cover. 

How to calculate buildings-only home insurance 

To get an idea of how much buildings insurance you need, look at the rebuild value of the home, i.e. how much would it cost to repair/rebuild in the event of damage. It might be a good idea to use the services of a residential property surveyor to get the most accurate estimate. 

If you are using the market value of the home or your own estimations, you might be over-insuring yourself, meaning paying more in home insurance costs than needed. 

How to calculate content-only home insurance 

To do this, you first need to make a list of the items you want to insure. Then estimate the cost of replacing them and add them all up. It’s important to use the current prices of the items instead of the original cost, especially if you opt for нew-for-old cover.

А few helpful tips:

  • Do one room at a time and itemise all the belongings you want to insure. Don’t forget about hallways, cellars, sheds, and lofts; 
  • Put high-value items on a separate list as some insurers might require you to pay extra for jewellery, expensive computers, bicycles, or antiques. 
  • Don’t be surprised by the total amount—the average family should have about £50,000 worth of contents to insure
  • Review the values of the home and contents every five years to ensure that you are not over- or under-insured. 

How to Reduce Home Insurance Costs?

We will leave you with some advice on how to lower home insurance premiums. 

1. Invest in a security system

In most cases, insurers will offer lower premiums if you have a quality security system, including an alarm, locks and home security camera.

2. Pay upfront

Monthly insurance payments are always higher than an annual lump sum. This is because the insurer sees the monthly payments as a 12-month-long loan and they charge you interest just as a mortgage provider would. 

3. Try to reduce external causes of damages if possible 

This includes trimming or removing trees around the property—falling branches could damage your roof or other parts of the home, whereas vegetation on the roof can cause structural damages. 

4. Consider a higher excess 

Similar to car insurance excess, the more you pay upfront in the event of a claim, the lower your premium will be. 

5. Build up a No claims discount 

If you have not made a claim in a year you will get a no-claim discount, i.e. you will pay a lower premium the following year. The more time goes by without any claims, the higher the discount will be. Bear in mind that an NCD is only valid for up to five years. 

6. Opt for combined cover

Combined insurance is usually offered at a discount, giving you another chance to save. However, just because you can get it for less, doesn’t mean it is absolutely necessary. 

If you are opting for landlord insurance, you probably won’t need contents coverage especially if you are letting out an unfurnished home. To protect their belongings, tenants will need to take out a contents insurance policy of their own. 

7. Shop around

The best way to save is to compare quotes. Contact insurers directly or use online services to compare prices—either way, it is important to look at several options before making a final decision. 

How Is a Home Insurance Premium Calculated and Why Does It Matter?

It can be difficult to determine whether you are paying the right price for your home insurance. You might be under-insured-which means your policy will not be able to cover any potential damages. On the other hand, you could be over-insured and paying more than necessary. 

To avoid both of these situations, take into consideration all the factors outlined above to get an idea of how much your insurance should cost and then compare quotes to find the best deal. 

My name is Marija, and I'm a financial writer at DontDisappointMe. Although finance might not be everyone's cup of tea, my 10+ years of working in one of the biggest banks in my country, and my interest in extensive research on everything finance/investment-related, have made me somewhat of an expert in the field (if I do say so myself). No longer having the passion to work in a corporate setting, I decided that I couldn't let all of this knowledge go to waste so I started writing. And, here I am! Today I try to share my knowledge with my audience in the hopes of making this topic as simple and interesting as possible. In my leisure time, I like spending time with my family and travelling to new locations.