Universal Mercantile Schedule
( Originally Published 1911 )
Origin of Universal Schedule.—The Universal Mercantile Schedule is the work of a committee that devoted several years to the subject, bringing the work out in its completed form in 1893. It was tested out in some six preliminary editions, and in its final form was published in the year mentioned. The schedule is an attempt to construct a universal system of rating—a system to abolish all special schedules and permit every risk of whatever kind, character, or occupancy to be rated. Mr. F. C. Moore, ex-president of the Continental Insurance Company, is the chief author of the work, three other gentlemen and six co-operating committees, representing underwriting organizations in different parts of the country, and the National Board of Fire Underwriters, being also associated.
Fundamental principles: The seven fundamental principles on which the schedule is based are :
(a) A schedule should recognize a key rate as a starting point, viz.: The rate of a building, of standard construction in a standard environment, i. e., in a city presenting the most favorable conditions for the prevention, discovery, extinction and confinement of fires to single buildings; and that the difference between the starting point, or base rate, of one city as compared with another should be explainable by charges for variation from standard. Unless differences between two cities as to the same character of structure are explainable, jealousies and antagonisms result in inciting adverse legislation.
(b) Inasmuch as all the risks of a city can not have the maximum benefit of the fire department, especially where street water mains are of inadequate sizes, it is clear that all risks in the city should not be rated alike, even though identical in construction and occupancy, but that they should differ according to the sizes of street mains, proximity to hydrants, fire engine houses, etc.
(c) Certain features of construction, as self-releasing floor beams, for instance, which improve a building, are of no benefit to the stock. The stock, there-fore, should not receive credit in the rate. A system of rating by adding a fixed sum to the final building to get the stock rate must by a process that recognizes features that are not of advantage to the stock result in an inadequate stock rate.
(d) Fire extinguishing appliances, especially for throwing water, should not receive credit to the same extent in computing the rates of stocks as in the rates of buildings, because water throwing damages stocks to a greater extent than buildings..
(e) Exposures should be treated differently from stocks in the case of buildings. A building may be so constructed as to be a complete protection to its stock, but requires a charge in its own rate for possible damage to its exterior paint, etc., etc.
(f) The rate of a stock should relate to that of the building in proportion as the latter is of poor construction, liable to be totally destroyed, and deficient in fire extinguishing appliances ; whereas there should be a rate difference between the rate of a building and its stock if the building is of standard construction and its fire extinguishing appliances are of the best. And this difference in rate should never be determined as a matter of judgment but by some automatic process to ad just the difference in rate to the conditions. This object the Universal Schedule accomplishes. No other schedule has provided for this vitally important feature.
(g) The fire record of a city should be taken into account in computing rates both at the beginning and the ending of the term for which the rate is computed. This is recognized by the Universal Schedule.
Scope of schedule.--The schedule has never been applied as published—except perhaps in one instance—but it has served as a basis with certain modifications for nearly all the schedules in use to-day in the larger cities and in different parts of the country, and has the widest use of any schedule up to the present time. The Dean Schedule, or Analytic System, which will receive attention later, comes next.
Schedules and schedule ratings are very much like tariffs in that they are never settled. Such questions are said never to be settled until they are settled right, but the right method of schedule rating does not appear to be imminent, and in all probability the subject will not be settled for many years if ever. The factors to be considered are so many that the efforts of more than one generation will be required before the proper solution is reached.
Life insurance bases its charges on the fundamental principles of mortality. Fire insurance has no such solid foundation; therefore, it will be subject to new interpretations as experience proves the old order of things to be wrong.
How is a risk rated?—T he initial question, how-ever, is not "How were schedules made?" or "What was their origin?" but "How are they applied?" This is the very practical question, "How is a risk rated?" It can be answered in no better way than by tracing its operation.
Two things are necessary to this purpose—a report on the risk and a schedule on which the risk is to be rated. The example given below of a risk to be rated is not taken from any actual property, but the schedule on which it is based is an adaptation of the Universal Mercantile Schedule.
(a) No. 35 A Street, Manhattan Borough, New York City, is a six story and basement building, dimensions 65 by 100 feet, without any dividing walls, having independent wall averaging eighteen inches of brick, excepting front, which is hollow iron. The ad-joining buildings on either side have walls entirely of brick, and the risk itself is occupied by a single tenant.
(b) The floors are of single board one and one-quarter inches thick, on wood joists, fourteen inch centers resting on wood girders, which are supported by exposed cast iron columns on all floors, the roof being supported by wooden posts and having a composition surface.
(c) Elevator and stairways at the front end of the building, both being open and adjoining.
(d) Open dumb-waiter at the rear and pierces second and third floors.
(e) The building is heated by a hot air furnace in the basement, having a metal cold air box, the smoke pipe of which is conducted to the chimney, the walls of which are four inches thick.
(f) The risk is occupied by one tenant, carrying a stock of canned goods, which have no first column charge and the second column charge is 40 cents.
(g) Building is equipped with fire pails, which are approved, but has no other allowance. What is the final rate on building and contents?
Key rate.—The first point to be considered, in making the rate is the key or basic rate for the city. This is usually determined for the entire city, or different districts in the city as the city may vary, and is based on such general factors as the following: Assuming the risk to be in a city under the protection of a fire department, with efficient water supply, etc., the special items to be considered in the key rate are the waterworks, fire engines, fire alarm telegraph, police organizations, fire department organization, fire marshal or coroner, width of streets, building law, electric wires, conflagration hazard, natural gas or oil for fuel, high winds, previous fire record, exceptionally favorable or unfavorable features of the city, chemical engines on wheels, auxiliary steamers, and the number of hook and ladder trucks to every four steamers. Credits should be given when these conditions exist or are in accordance with the standards, charges being made if they do not exist or fail to reach the standard. The schedule, in determining the key rate, assumes the existence of none of these things and makes an initial charge of 20 cents.
Rating by schedule.—It is assumed in this case that the key rate being duly measured is 20 cents. Turning to the risk itself and to the report thereon, the walls appear the first thing to be considered. The re-port under the first paragraph describes a building of six stories and a basement. The standard building six stories high should have walls averaging twenty-two inches. The building in the report has walls averaging eighteen inches. In the charges provided is 1 cent for each four inches in variation from the standard, but where the building is over four stories high there is a double charge. The building in this case is six stories high, therefore there is a charge of 2 cents for each four inches variation. There is but one four inch variation, hence the charge is 2 cents. The front of the building is iron; iron fronts are bad and so an extra charge of 3 cents is made.
The roof is a composition, as shown by the second paragraph of the report, and according to the schedule a charge of 1 cent should be made. The floors are one and one-quarter inches thick with a charge of 5 cents for single flooring and 2 cents for double flooring less than three inches thick. The charge to be made is 5 cents. The finish of the building comes next, and as the report does not state any deficiency, it may be assumed that no charge is to be made.
The area is 65 by 100 feet, or 6,500 square feet. The schedule permits 2,500 square feet without any charge, leaving 4,000 square feet to be charged at 3 cents per thousand, a total charge of 12 cents for area.
The height of the building is six stories; four stories without charge is permitted. The fifth story has a charge of 3 cents and the sixth story of 5, hence the charge to be made is 8 cents.
The report states that there are elevators and stair-ways at the front end of the building, both being open and adjoining. An open elevator calls for a charge of 6 cents; an open stairway 8 cents. One charge is made where two deficiencies of this character are adjoining. This charge would be the greater of the two, hence 8 cents is proper. A dumb waiter is at the rear of the building and pierces the second and third floors. It should be charged 1 cent for each floor pierced, or a full charge of 2 cents in this case.
The building is heated by a hot air furnace with metal cold air boxes ; this entails a charge of 1 cent. The chimneys are only four inches thick, and as eight inches is the standard a high charge is accordingly made for this deficiency, being 12 cents. Another item in connection with the building calls for notice. In the second paragraph of the report unprotected iron columns are noted ; the charge is 10 cents.
A summary at this point shows :
Key rate 20 cents
The schedule makes provision for other items before this total is reached, but they do not occur in the risk and a sufficient number have been given to show the method of operation.
There should be deducted at this point any item of construction of exceptional value, such as tin or sheet iron between the floors, the grade floor fireproof, all posts, etc., twelve inches square. The property presents no features of exceptional construction; therefore no reductions are made.
Hazard on stock.—The tenant who occupies the building is a wholesale dealer in canned goods, the hazard of this business being considered so slight that the building is not penalized because of occupancy. The mercantile schedule was the first to emphasize the fact that the hazard on stock could be divided into two factors—the possibility of fire or the ease with which a fire might start or be started by stock, and the damage to stock caused by a fire. Canned goods, however, do not present in themselves anything hazardous. They would not start a fire of themselves, neither could a fire be easily started in such stock.
Deductions for fire appliances.—Fire appliances appear next in order, deductions being made for any of the following devices :
Also if the building should be equipped with offices throughout or for offices above the grade floor. The building under consideration is not thus occupied, and apparently has fire pails only, for which an allowance of 5 per cent is to be made; hence from the 84 cents 5 per cent is deducted, or .042, leaving .798.
Exposure.—The next feature to be considered is the relation of this property to the surrounding properties, that is, its exposure on all sides. The table of exposure provides that any building within one hundred feet, on the right, left, front, or rear, may be deemed as exposing the risk. Beyond that distance no exposure is computed. The exposure table is some-what complicated and takes into consideration not only the distance but the height of the exposure; whether there is a blank wall toward the exposure, or whether it is pierced with windows, etc. Having determined the exposure by the table provided therefor, the charges prove to be 8 cents, which, added to the .798, makes a summary of .878.
Co-insurance.—Up to this point the schedule has presupposed that co-insurance is not carried. Co-insurance will be treated more fully later on, but at this point it is sufficient to state that it is an agreement on the part of the insured to carry a certain amount of insurance. The amount commonly carried is 80 per cent. The Universal schedule does not make any pro-vision for a specific amount of co-insurance, but makes a deduction on the non-fireproof schedule of one-fourth of 1 per cent for each 1 per cent above 20 per cent. Assuming that 80 per cent is carried there is 60 per cent above the 20 per cent, one-fourth of which is 15 per cent. Hence from the .878 there is to be deducted 15 per cent, or .132, leaving the rate .746.
Faults of management.—This item brings the rate to the final group of factors to be considered, namely, faults of management. There should now be added any charges for carelessness, untidiness, broken lath and plaster, and other similar glaring defects. These charges are made at this point, and are made large in order to secure their correction. When the defects are corrected the charges are removed, leaving the computation of the rate unaffected. Assuming no faults of management the building rate would be .746.
Rate on contents.—After the first column charge has been added to the building rate there is then deducted a certain percentage, say, 20, of the building deficiencies, since the entire sum of the building deficiencies should not be charged against the contents. There being no first column charge in this case the amount from which we deduct 20 per cent of the building deficiencies is .84. The building deficiencies are, of course, .84, less .20, the key rate of the city not being a building deficiency. If we deduct 20 per cent of this amount it leaves us 71 cents as the key rate for our contents. The stock takes a second column, or occupancy charge, of 40 cents. Stock distributed over several floors is better than stock concentrated on one floor, hence the insured is entitled to an average height charge for the floors occupied. The basement is subject to a 5 cent charge, being one floor below the grade, The grade floor is subject to no charge. Then from the grade floor up the charge is 5 cents, with an increase of 5 cents for each floor higher than the one below. This charge is made up as follows :
Basement 5 cents
Stock is distributed over each of the seven floors; therefore the average height charge is .114, which, added to the .40 occupancy charge and the .71 key rate, gives a total of 1.224. The contents, as in the case of the building, are subject at this point to a reduction for any fire-fighting devices. Only fire pails apply, and 5 per cent deducted from 1.224, is .061, which subtracted leaves a remainder of 1.163. The exposure has already been computed as 8 cents and this now added makes the amount 1.243.
The deduction for co-insurance on the contents is one-half that on the building, as it is not deemed worth so much as is in the case of the building. Damage to contents always amounts to a higher percentage than that of the building except in a very extraordinary case, so there is deducted for co-insurance 7 1/2 per cent, or .093, leaving a rate on the contents of 1.149.
Simple example.—It should be understood that the foregoing is a comparatively simple example of the problems presented for consideration by the real work of rating. In a growing American city, the difficulties are almost as numerous as the inhabitants, certainly as numerous as the buildings, since each building possesses an individuality of its own, and the rater must give expression to that individuality in the rate of insurance. The illustration, however, is sufficient to furnish a guide to the application of any schedule. Whether the problem be simple or intricate it is a mat-ter of taking the data furnished by the inspection re-port and measuring it by the standard of the rating schedule; the result is the rate.
The Universal Mercantile Schedule makes provision for rates on fireproof buildings and on frame buildings, being capable of wide application. A manufacturing plant, presenting as it does a large number of varied processes, requires a somewhat detailed system of occupancy charges. In Philadelphia this has been worked out to a certain extent by means of the so-called coupon system, which gives the occupancy charges ; but the Universal Mercantile Schedule is used as the basis on which the building rate and the key rate for contents is made.
Recapitulation.—As the entire rate may prove of value to the student it is here appended:
Key rate .20
Deduct 5%, fire pails .042=.798
Co-insurance. Deduct 15% =.132
Final building rate =.746
The key rate for the contents is the building rate at the point where the total is .84 less 20 per cent of building deficiencies, or .71.
Key rate 71