Insurance - Minimum And Specific Rates
( Originally Published 1911 )
Minimum rates.—Rates may be classified in many ways, the customary way being as "Minimum" and "Specific." The minimum rate is a rate applying to a large class; a class so identical in size, experience, and uniformity of hazard as to make specific rating unnecessary. A type of this class is the ordinary dwelling house, of which there are probably ten million in the United States.
If the ordinary dwelling has a value of $5,000 and a rate at 40 cents per annum there would be for each $100 of insurance 40 cents; for each $1,000 of insurance $4, and for the $5,000 of insurance $20. But in a large portion of the country many policies may be written for three years at twice the annual rate, hence it would be a matter of paying $40 once in three years to secure the insurance of $5,000 for that period. It is evident that if the insurance can be furnished so cheaply any money expended in inspecting or other work would not yield results comparable with the expense and would add so materially to the cost as to necessitate the increasing of the rate. This great body of risks, therefore, may be considered as coming under minimum rates, this minimum rate being the amount fixed for the territory by the organization of insurance companies and subject to no reduction, except, perhaps, for the amount of insurance carried, that is, the co-insurance clause attached.
Minimum rates apply to any large body of risks, such as dwelling houses, stores and dwellings, etc., which are so numerous and of so uniform hazard as to make a fairly safe average on which to base the rates.
Specific rates.—Specific rates apply to a certain building on property occupying a certain location. The specific rate is made for the risk to which it applies and does not apply to any other.
In a computation of the specific rate it is necessary to consider seven principal factors, namely:
Under these seven factors may perhaps be grouped all the information necessary for the making of the specific rate.
The specific rate is based on a certain schedule made to apply to the class, and it is necessary to consider schedule rating before proceeding to analyze schedules.
Schedule rating.—Schedule rating differs from other methods of rating in vogue in the United States up to 1870 with the exception of one or two schedules devised for rating cotton mills and some others, which were in their essence schedule ratings.
Schedule rating may be defined as the making of the rate in such manner as to penalize those items in the construction, occupancy and care, which experience has shown tend to cause fires; and as a system of credits to the risk for features that are helpful either in preventing or putting out a fire. The idea of schedule rating may be better expressed in the following illustration :
Suppose, for instance, that every hotel were charged a flat rate of $1, the only question to consider being "Is it a hotel?" If so, the rate is $1. Now it is evident that while two hotels may be alike, yet it is very unusual. There are hotels of frame construction in the country far from all fire protection; and then hotels of fireproof construction in the city under the best of fire-fighting devices. If the rate of $1 is high enough to yield a profit on the frame hotel it is evident that it is several times too high for the fireproof hotel in the city. In all probability the system of schedule rating, which endeavors to treat each risk on its own merits, is as necessary for the success of the insurance business as it is equitable to the insured.
Difference in risks.—A system of schedule rating does not rate all hotels alike. It takes into consideration whether the hotel is frame, ordinary, or fire-proof construction, and makes a difference for that one factor alone. It also takes into consideration the height of the different buildings, the number of rooms, the space the hotel covers, the conditions or relation of the kitchen (an important factor in a hotel, as it contains the furnace, stoves, etc.) and whether the hotel is heated by stoves in the individual rooms or by steam from a central point safely installed. These are the simplest of factors. The following shows an early at-tempt to discriminate in the various features of a risk:
Note: Surveys to be sent to office for approval, before issuing policy.
Brick or stone, slate or metal roof detached.
Floors laid in mortar, if ceiled underside, or of heavy plank with Norway pine 11/4 inches thick over plank.
Scuttle in roof, with permanent ladders on each side of building reaching to ridge of roof, platforms connected with ladders to one window in each story.
Picker in separate fire-proof building.
Lighted with gas, or by oil lamps enclosed in glass.
Good force pump that can be put in operation inside and outside of mill of sufficient power, and riveted leather hose of sufficient extent to reach all parts of mill, with places for attaching hose in each story, and hydrants outside. Casks of water in each room with pails constantly filled. Faithful watch every night and good watch clock.
Lightning rod with numerous points above roof.
No machine shop in mill.
Warmed by steam, pipes to rest on iron brackets, and to be one to two inches from any wood work or combustible substance (pipes should be kept clean and free from all combustible substances.)
Elevators to be cased, and when not in use to have scuttles or doors closed on each story.
Waste to be removed from mill daily, otherwise not insurable.
RATE OF PREMIUM 100 cts.
ADDITIONAL PREMIUM FOR DEFICIENCIES.
Roof of wood or composition 10 cents
Additional for age and external exposure."
Variety of schedules.—The principle once recognized that no two risks were alike and that each should be treated on its individual merits led to a variety of schedules. Schedules, for instance, have been devised for woodworking risks, for theaters, lodging houses, and churches; for light and power stations, car barns and repair shops for car barns; for sugar refineries, breweries, and any other manufacturing plant, etc., and it should be noted that the names of these schedules indicate the class of risk to which they apply.
A fairly successful effort has been made to construct one schedule applying to all manner and kinds of risks. This may be possible. The tendency is in that direction, but as yet a special schedule applying to a certain specific class seems to be more satisfactory than a general schedule applying to all properties.
Two schedules stand out before the insurance world distinct from all others. Each should be treated in turn, since its influence upon the question of schedule rating has been great, the contest between the two not yet being settled.