If you’ve bought home insurance online, you’ll know it’s no easy feat. There’s a huge list of (sometimes seemingly random) questions you have to answer, some of these may seem pointless but in general they all have some use. At Homelyfe we want to cut out all the unnecessary elements of insurance, and we want to give the power back to the people by making insurance simple. So, here’s how we do it, and why.
At Homelyfe we are not traditional insurance people, the team is mostly from a tech/startup background, so we approach the traditional and antiquated industry with a fresh perspective. We’ve spent the last few months unpeeling the layers of the insurance industry onion, figuring out how it works and how we’ll improve it.
Homelyfe policies explained
We have big plans for disrupting the industry to make it a whole load better for the customer. We will offer policies on behalf of our insurers based on the information you enter via our app. This information forms your ‘Risk Profile,’ i.e. how risky you are in insurance terms, as decided by the underwriters. We use this information to always offer you the best policy at the lowest price.
What is an underwriter?
Underwriters are the people with the pots of money ready to pay out when you drop a gin and tonic on your brand-new laptop. The money they use to pay the claims come from the premiums on the insurance policies they sell, so they need to make sure they sell enough policies at the right price to cover the cost of the claims. They determine the price based on risk.
You are a risk (some people more than others)
We can put a price on your head, a “Risk Profile” price. This is based on various factors including your postcode, the size of your house, the quality of your door locks, your occupation, or even your collection of vintage Star Wars memorabilia. Insurance companies have made all of this so complicated that most of the general public don’t have a clue as to how this is calculated even though the entire population will be covered by some type of insurance. So, as we’re here to demystify the insurance world, here’s a little insight into this black box….
The easiest way to describe how the price is generated is via an example. So meet Bob Cheesemith, a fictional 42-year-old male.
Let’s start with contents insurance
With contents insurance, we aim to offer enough cover to replace everything in your home, so the place to start is:
Q : What would it cost to replace the entire contents of your home?
This is the beginning of pricing Bob’s risk; the starting policy premium is calculated using a factor of the total value insured. In this case we’ll say it’s 50p per £100 of contents insured. So that becomes:
(£25,000/100) x 0.5 = £125.
The starting premium is £125, now we have this figure we start weighting it based on other questions.
Q: Would you like to insure your contents against accidental damage?
This obviously increases the price, the weighting factor for accidental damage is 1.3
£125 x 1.3 = £162.50
Now Bob’s covered for accidental damage his premium is £162.50
Q: Address to be insured?
A: 7 Stilton Close. Springfield, West Sussex, BN6 8BV
The postcode will give us various weightings on the price, in this case the BN6 8BV postcode has a weighting of 107% on the price.
£162.50 x 1.07 = £173.88
This gives us a total premium price of £173.88 for Bob’s contents insurance.
A look at buildings insurance
There are many more factors involved when calculating buildings insurance. Firstly, you should be covered to rebuild the entire property if you need to do so, so the best place to start is:
Q: How much would it cost to rebuild the entire property?
The initial premium for Bob starts in a similar way to how we calculated contents insurance above. Using a factor of the total sum insured to calculate the price, in this case a factor of 0.15 per £100 of rebuild cost, from that we get the following calculation:
(£350,000/100 ) x 0.15 = £525
Bob’s buildings insurance starting premium is £525
Side note — The rebuild cost is not the sale price, it will (generally) cost less to rebuild a property than to buy it again, as you can see, it’s very important you get this number correct!
Next up is the construction of the building:
Q: What are the walls made from?
From an insurance perspective, this is a standard wall construction, there is no need to weight the premium so we have a weighting factor of 1.00; the premium is still £525.
Q: What is the roof made from?
A: Green Roof
Bob is eco-friendly, he’s bought a house with a green roof, good on Bob! From an insurance perspective though this is a risk as it is non-standard construction. We have to weight the premium by a factor of 1.15.
£525 x 1.15 = £603.75
Q: What is your Date of Birth?
Bob is over 40, this is good! People over 40 are obviously more sensible when looking after their property, the weighting for somebody of this age is 0.9.
£603.75 x 0.9 = £543.38
So as you can see weightings can increase and decrease the premium price, in this case from £603.75 to £543.38.
Q: How many years of no claims discount do you have for buildings insurance?
A: 5 years
Bob is careful, he hasn’t made a claim on his buildings insurance in over 5 years. This has a reducing factor on his premium of 0.6.
£543.38 x 0.6 = £326.1
Here we arrive at the final price for Bob’s buildings insurance £326.1.
As you can see the answers you give to the questions will affect your premium price, so it is important to be as accurate as possible, no matter how absurd the question may seem. At Homelyfe we will only ask a question if it is necessary.
How we’re going to improve the process
We know filling out these forms is tedious. We’ve all had to do it at some point and agree that it can be a complete pain. One question that stood out for me last time was: “What is the percentage of flat roof?” How on earth would a normal person know that? So, at Homelyfe we will be rolling out features to assist and reduce with the form filling process. We’ll be making announcements about these in the coming months.
There are plenty more factors involved when buying a policy not mentioned here, such as policy endorsements (special terms), excess, floods & subsidence, named items etc. We’ll be covering these and how we intend to improve them in future blog . To get you started, have a look at our insurance glossary blog.
*Disclaimer: These figures are all purely fictional and are used to illustrate a point, this is not exactly how risk is calculated at Homelyfe. This is also overly simplified, in real life examples there are far more factors at play.
This blog was written by Simon, Chief Engineer