Insurance - Analytic Schedule
( Originally Published 1911 )
Origin.—The complete title of the schedule is the Analytic System for the Measurement of Relative Fire Hazard. The schedule is the work of Mr. A. F. Dean, of Chicago, Assistant Manager of the West-ern Department of the Springfield Fire and Marine Insurance Company, and is one of the two schedules widely accepted throughout a large part of the United States, the other being the Universal Mercantile.
The origin of the schedule is due to an attempt to formulate a system for measuring exposure. After the table was formulated a frame tariff was devised in order to test it. This occurred the latter part of 1902, and the test was made in the small towns of Illinois. It appears to have met with a favorable reception and a schedule for brick buildings was added and the frame schedule revised. It spread from the smaller to the larger towns and from one state to an-other, and is said to-day to be in use throughout the Middle West from Nebraska to West Virginia and from Minnesota to Tennessee.
Percentage system.—The principal departure of the Analytic System from previous schedules is in the extension of the percentage system. The Universal Mercantile Schedule had already introduced this system of percentage, additions or deductions in the credits to be given to the risk. The Analytic Schedule departs from other schedules and makes the deficiency charges as well as the credits subject to a percentage increase. Thus, in the example given in the previous chapter dealing with the Universal Mercantile Schedule it was noted that the height charge, for instance, was a certain number of cents for the fifth floor and a certain number of cents for the sixth floor; that is, the deficiency charges were a fixed amount. In the Analytic System these additional charges are a percentage of the base rate, and it is this extension of the percentage which indicates one of the widest departures of the Analytic System from other schedules.
In its general approach to the problem the Analytic System does not differ essentially from other schedules. There is the basic rate. To this there are additions for deficiency charges, credits for superior conditions, charges for occupancy, credits for fire-fighting devices, an addition for exposure charge, and finally charges for faults of management, though in the Analytic System these are called "after charges."
Relativity. The matter of relativity in the Analytic Schedule is one of its greatest contributions. The rate is determined by percentage charges as well as credits, a consistent whole being bound together in all its parts, and relativity being reached by means of the percentage system. Let us assume that the basic rate of a city is 50 cents. If a charge of 10 cents is added because of a defective wall, this is 20 per cent of the basic rate. If the general conditions of the city are improved so the basic rate falls to 40 cents and the charge of 10 cents for the defective wall is continued, it is then 25 per cent of the basic rate.
The Analytic System declares that the relation between the charges for deficiencies and credits should always be a fixed percentage of the basic rate; hence, in place of adding a flat charge of 10 cents for a defective wall the charge might be 10 per cent, so that if the city had a basic rate of 50 cents the charge for the deficiency in the wall would be 5 cents, and when the basic rate of the city fell to 40 cents the charge would be 4 cents, still remaining at the same percent-age. In other words, a fixed relation should always exist in all parts of the rate.
Basic rate.—The basic rate in the Analytic Schedule is the sum total of the items not susceptible of analysis and hence are lumped together ,in one sum. Having determined the basic rate which, of course, differs in different states and for different portions of the same state, and for a city within a state, the schedule is computed by adding to this basic rate percentage additions for deficiency charges arising from height, area, walls, roof, ceilings, skylights, floorway openings, partitions, chimneys, exterior attachments and warerooms. The building may be of superior construction, and a due percentage is allowed accordingly.
Factors influencing rate: The matter of occupancy as affecting the rate is divided into three parts: (a) As the cause of fire ; (b) as an aid to fire when started, and (c) as an effect of fire, smoke, or water, The causes of fire, though many, are embraced under the two general heads of inert and active; the first em-braces those causes practically without hazard, and the second those with a hazard of varying degree.
The combustibility of merchandise is divided into five clauses, known as,
Two intermediate grades are recognized—c3 1/2 for a quantity measurement on large open stock, and c41/2 principally for minor industrial risks. To assist in determining causes of combustibility there is a labor table dealing with the number of hands, a power, furnace, and dry room table, all providing sub-divisions or charges depending on number, arrangement, etc.
The third factor in occupancy is damageability ; that is, what effect fire may have upon the merchandise. Four grades, called "d1," "d2," "d3," and "d4," with three intermediate grades, have been made.
In determining this part of the occupancy charge, the schedule departs from the percentage, system, making a fixed charge. Naturally the location of the stock on a certain floor is considered as well as the construction of the building, brick or frame, and the important point of the risk's being in a protected or unprotected town.
Public protection is divided into seven grades, the divisions being made not by the schedule but by adoption of the classes established by the Western Union. Private protection furnished by the individual, as distinguished from public supplied by the community, receives due recognition on the percentage basis.
The principles of the exposure charge are based on radiation, absorption, and transmission. The table of exposure charges is worked out as minutely as may be expected considering that the schedule grew out of an attempt to solve this difficult problem.
General considerations.—The problem of rating in fire insurance is one which has received full consideration in the past and bids fair to receive it in the future. No schedule has ever commended itself as the proper schedule to be adopted for all times, places and classes of business. Much discussion has been spent over whether or not rating is a science. It is not a science; it lacks the fundamental laws necessary to any science.
It should be frankly admitted that the data obtain-able are extremely meager for definite results. The classifications are more or less at variance, no one system applying to all businesses ; some companies use a classification of eighty different groups, others 125, and from that point up to several hundreds. The greatest part of the business is probably classified under the lowest group.
The business of fire insurance is constantly meeting new hazards. It is evident that if old experience does not meet new conditions there must be new adaptations, a new working-over, and a new point of view.
Limitations of rating.—It should be pointed out that rating has its limitations. It is not possible to devise a system of rating to enable the underwriter to write a risk without doing more than merely looking up the rate. Rating can never be brought to a mathematical certainty. Even when the best has been done the insurance companies frequently decline to write at the schedule rates but may be willing to write at a higher rate. The difficulties of the problem will be appreciated if a simple illustration is used. The conflagration at Chicago was caused by the kicking over of a lantern by a cow that was being milked in Mrs. Leary's stable. If every cow ' under like conditions kicked over a lantern and started a conflagration we should have a definite fact to depend upon which would be as fixed as the law of mortality in life insurance. As a matter of fact this was the only cow that ever kicked over a lantern that caused a conflagration, and it is this element of chance which is constantly present in the business. If it were otherwise how simple the problem would be ! Knowing that the kick of a cow causes a conflagration we should promptly dispense with lanterns and find some other means for lighting the premises, but the fact that it occurred only once, and in all human probability will never occur again, does not furnish very valuable data on which to base a conflagration charge.
The most that can be hoped from any system of rating is that it should make equal rates between similar classes of business under similar conditions. If the work of rating in fire insurance can be brought to that admirable position it will have accomplished all that is necessary and all that can be asked. Credits and charges are empiric. If the latter is placed too high an undue proportion of the rate comes from deficiency charges. If placed too low there is no incentive to the insured to correct conditions. A medium must be reached. The same is true concerning the credits. It is not known that 5 per cent is the proper allowance to make for fire pails. They may or may not be worth the sum mentioned. Their efficiency has been demonstrated and it is deemed good practice to make the allowance large enough to insure their installation in every business property. Beyond that it is impossible to go.
Sprinkler risk data are more complete. This has been a necessity to the success of the business owing to the cost of sprinkler installation, and again owing to the large reductions granted in the rate of insurance, making the profit exceedingly small and hence necessitating the utmost care that an undue loss does not occur.
Application of schedules.—It requires no special training beyond a certain amount of experience to handle the mass of class rating. It is a different problem, however, to approach the subject of specific rating and the application of schedules as intricate as the Analytic System and the Universal Mercantile Schedule. To such an extent have these schedules developed that the work is almost entirely done by men whose exclusive function is rating and who may or may not be familiar with other branches of the business.
The tendency in this direction will be even greater in the future than in the past. It should be emphasized that while the problem of rating is one of the most difficult yet the knowledge concerning it is constantly in-creasing. The problem should be approached with an open mind, and better results will be achieved if too much is not claimed for any one system.