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How are rates developed?

Michigan's home insurance is regulated by state law on a competitive basis. This means rates cannot be considered excessively high as long as there is competition among companies. Insurance companies compete with one another for customers by offering a variety of rates and services. Insurers are prohibited from communicating with other insurers about the rates they are setting.

There are two types of homeowners policies: non-group (or individual) and group. A group policy is one offered to a group or association's members. Coverage provided by group and non-group policies are generally similar. However, whether group or individual, companies offer different coverage options in their policies.

State law sets forth the factors companies may use when setting their homeowners rates. More rating factors are allowed for group policies than for non-group policies. Rating factors must be specified in the company’s underwriting rules and applied uniformly and consistently to all of the company’s policyholders. Some of the factors that companies can use in setting rates may include the type of house (wood or brick), the age of the home, physical condition of the home, security and safety devices (burglar alarms or smoke detectors), and distance from a fire hydrant.

Companies use premium payments to pay for covered claims. In setting premiums, companies must estimate how much money they will pay for the repair or replacement of homes. These costs increase annually and are one of the causes of insurance premium increases. When large numbers of claims are filed, following bad weather such as heavy winds, tornados, or heavy snow, companies may pay out more money than they anticipated. This increased frequency of claims is another reason premiums may increase.

Insurers writing non-group policies are required at least annually to provide consumers the opportunity to request a description of the rating classifications they use in setting rates. This notification must occur with the notice of the renewal from the insurance policy. The insurers also must provide consumers with a process to use if the consumer believes the premium being charged is incorrect. Under this process, any consumer believing that the premium is incorrect based upon the rating classifications can ask for a review of the rate by the company. DIFS can review the rate if the consumer believes it is still incorrect after the company review.