Insurers crack the code

YOUR postcode plays a vital part in calculating household insurance premiums. Using postal areas to work out a risk rating for a house makes sense, but sometimes the result is "postcode blight". People in affluent, safe areas can be forced to pay higher premiums because their postal town is in a rougher district.

Such anomalies arise because most underwriters use only the first part of the postcode, the first three or four numbers and letters, to assess an area's risk of theft, flood or storm damage. This, along with information about the house and the proposer's job and lifestyle, forms the basis for the premium.

Improved computer software allows insurance companies to look at the whole postcode and use that information to match a claim history for as few as a dozen houses. The result, insurers claim, is more accurate premiums. For some households, that is undoubtedly good news, as their cost of cover will come down. For others, the benefits are less clear. People in urban areas may find that insuring their possessions becomes still more expensive.

One insurer using the new system is Liverpool Victoria. The friendly society has installed computer software that rates risks according to the whole postcode. The system ensures that "low risk customers will not subsidise high risk policyholders".

Liverpool Victoria believes it also gives better-value premiums. It cites examples from Insurance Advice that show Liverpool Victoria as the cheapest insurer for three different couples looking for pounds 25,000 of contents cover. In one case it is more than pounds 200 cheaper than the worst performer, in this case Direct Line.

The Liverpool Victoria policy has other unusual features. Insurance comes in three tiers, each with higher premiums but extending protection, for example by adding accidental damage cover or cover for personal items away from the home. The company also calculates the sum insured itself, based on its own estimates for the type of property and the number of occupants. It believes this is fairer than leaving it to householders to estimate the value of their possessions and risk either over or under- insurance.

David Stevens, an underwriter, thinks that other insurance companies are certain to adopt similar systems. "It is inevitable that insurers will look to break down ratings into ever-smaller segments. It is an opportunity for insurers to quote for a much wider range of customers than before; the downside is that some people will find insurance more expensive."

After postcodes, lifestyles could be the next insurance battleground.

Age, job and even a policy-holder's personal relationships are all important. "Married people are better risks, for example, because they don't go out as much; when you are older, you stay in more and you may be a better risk," says Suzanne Moore at the Association of British Insurers.

It may be that the best way to find cheap insurance is not to movehome, but to stay at home.

TABLE OF PRICES

Best deals from Liverpool Victoria (using new rating system, telephone 0800-680 690)

Home contents insurance worth pounds 20,000, based on a 28-year-old single man:

Two-bedroom purpose-built flat, Clerkenwell (London EC1R), pounds 68.62

Two-bedroom terraced house, Leeds LS5, pounds 160.46

Two-bedroom converted flat, Edinburgh EH6, pounds 108.91

Three-bedroom house, Bristol BS8, pounds 105.27

Best deals through a broker (source: Berry Birch and Noble, telephone 0181-777 7778)

Two-bedroom purpose-built flat, Clerkenwell (London EC1R), pounds 138.98 (General Accident)

Two-bedroom terraced house, Leeds LS5, pounds 89.10 (GA)

Two-bedroom converted flat, Edinburgh EH6, pounds 70.20 (GA)

Three-bedroom house, Bristol BS8, pounds 70.20 (GA)