How are home insurance prices calculated?

Your home insurance premium is a very complex calculation, and it’s this complexity that can make pricing seem erratic and baffling. Here’s a very simplified list of the main factors your home insurance price takes into account.

Does where I live affect my premium?

On a national or neighbourhood level, where you live will greatly influence the cost of your home insurance.

One end of the street’s prices could be very different to those at the other end. Whether you’re in the countryside, inner city or suburbs, there is no hard and fast rule over what areas or locations are cheaper to insure than others.

Your experience of your street and hometown might be very different to the statistics and analysis the insurers (or their computers) see.

You won’t know how often people in your area claim on their home insurance or the things they claim for – but the insurers will. This knowledge forms models of likelihood, past experience and probability that are all used when calculating someone’s home insurance price.

What about the type of house I live in?

There’s so much to weigh up when working out home insurance prices. Is a terraced home less likely to be broken into if there’s no side entrance or entry to a back garden? Is a detached home more vulnerable?

The type of building you live in, its age and even what it’s built from all go into the mix when it comes to working out your premium.

Tot up your treasures

The total value of all your belongings and home contents will influence your cover price. It can be surprising how much furniture and everyday items amount to so it’s a good idea to check you’ve got enough contents cover.

If you have any high-value items such as watches, jewellery, antiques or paintings as ‘specified items’, this will be factored into your premium too.

The cost of claims

The amount insurers have to pay out on claims is the driving force when it comes to premium prices. This is because the largest portion of your home insurance premium is spent on paying for fellow policyholders’ claims.

The number of claims and how much is spent on payouts will dictate how much that portion of your premium will be. The trend of increasing costs to fix claims coupled with the increasing numbers of claims is a double blow to home insurance prices.

Repairs and replacements are more expensive

If your home needs repairs because of a claim, you’ll likely find the expense of putting things back to normal has increased.

The cost of building materials and labour rose during and after the pandemic due to supply issues, declining worker numbers and rising energy costs. This is still the case today, so payouts need to cover the funds needed to get homes back to how they were.

The same goes for items in your home too with the rising costs of electricals, furniture and jewellery.

The effects of extreme weather

You’ve no doubt noticed the number of named storms mentioned on the news these days as extreme weather is becoming more frequent.

This reality is made very clear with the £585 million paid out by insurers in 2024 for weather-related damage caused by storms, flooding and frozen pipes. This is up 28% on the previous year’s weather claims and followed the UK’s busiest storm season since 2015/16.

Pay more to pay less

Your home insurance policy is likely to have an excess to pay – it’s the amount you’re prepared to contribute to a claim. Most of these excesses are compulsory and vary on the type of claim made.

If you offer to pay a voluntary excess, your premium goes down. This isn’t just because you’re offering to contribute more, but you’re not as likely to claim for smaller incidents.

The average voluntary excess on home insurance seems to be around £250 – the figure’s the same for contents-only and buildings-only policies.

Don’t raise your excess to a high level purely to reduce your premium though – your excess needs to be affordable in case you need to make a claim.

What’s IPT?

Insurance Premium Tax is added to the cost of every home insurance policy and goes to the government, just like VAT. A significant part of your home insurance premium is IPT, and the current rate is 12%.