the underwriters and the public. In life insurance the problem of fixing rates has been reduced to a mathematical science. During the last thirty years the rate of mortality for the general population has scarcely varied. Applicants who do not qualify according to a certain arbitrary standard are as a rule rejected, while those who do qualify are generally insured without discrimination in rates. The difference in hazard between insurable risks in life insurance is relatively small, and the factors governing the law of mortality are almost constant. In fire insurance, however, as stated by Mr. F. C. Moore, "there are more than a hundred features of construction in a single building which should enter into the consideration of its rate, irrespective of nearly forty features of its city or environment, nearly forty more different features of fire appliances, to say nothing of more than a thousand possible hazards of occupancy. It is the duty of fire-insurance companies to take all these factors into account, to properly classify them, and then to assess a rate on every individual property which shall justly measure the risk. This is, to say the least, a gigantic task, and since no man's memory is capable of remembering all these items, and no individual knowledge is sufficient to put a price on them all, the fire-insurance business has recognized the necessity not only of conference, which makes possible the combining of the knowledge of many underwriters, but also of furnishing to the fire-rater a printed schedule which will serve as a guide to his memory and prevent mistakes and omissions.

Systems of Rating.-Generally speaking, fire-insurance rates are determined in two ways, viz., by personal judgment or by schedule. The first of these methods is being rapidly displaced by the "schedule system," although at one time, when the fire hazard was less complex than now, it was in general use, and served its purpose well. Its operation is well described by Mr. Richard M. Bissell in his lec

ture on "Rates and Hazards.'' 1 He says: "By means of a more or less complete system of classification, companies ascertained in a rough way the average cost of many kinds of risks, and this information was put into the hands of their special agents or gradually absorbed by them in the course of their work. Formerly special agents did practically all of the work of making rates in company with local agents. When a town was to be rated, these average cost figures were used as basis or foundation rates. Usually towns were rated by committees of from two to five special agents who acted for all companies. No rule or regular method of procedure governed the making of rates under this system. The rates so made simply indicate the opinion or judgment of the rate-makers. Little attempt was made to analyze the factors which determined the judgment of the committee as to each risk. Nevertheless, since that judgment was usually the result of the experience and observation of many years spent in such work, the rates made were in many cases quite satisfactory, and equitable to a moderate degree. No attempt was made to take account of minor differences, but all good features or defects of construction and exposure, and also all the hazards of occupancy and processes, were lumped together, and if, as a whole, to the mind of the raters, they were sufficient to appreciably differentiate the particular risk from the average risk of its class, a penalty was added to or an allowance was made from the average rate which experience had shown to be about adequate."

Under such a system it is apparent that personal judgments might differ greatly, and that unlike rates might result in the case of similar risks. With the increasing complexity of modern construction of buildings, the introduction of numerous fire-protection facilities, and the devel

1

1 Yale Insurance Lectures, vol. 2, pp. 106, 107.

opment of manufacturing and commercial processes, the shortcomings of this system became more and more apparJustice in rate-making required that all these changes should be properly considered, and in consequence less and less reliance was placed upon personal judgment in making rates, and instead the companies depended more and more upon the use of specialized schedules.

Originally two rates were applied, according to whether the building was of brick or frame construction, but such important features as occupancy received little or no consideration. In more recent years the companies have resorted to elaborate classifications of risks, until to-day properties are divided by some companies into more than a hundred main classes, each class in turn being subdivided according to construction, fire protection, and the type of city. Statistics and other data have been collected by the several companies with a view to ascertaining the average cost of insuring each of these groups. In fact, it is stated that over $1,000,000 is expended annually by the fire-insurance companies of this country for rating purposes.

A great variety of rating schedules are used in various states and cities of the country, but most of them, while differing in details, resemble each other in principle. In the case of various groups of properties, where but few differences exist in the class, such as residences, schools, etc., the rate for the class is applied, and allowance made for the type of construction and the presence or absence of efficient fire protection. On the other hand, in the case of "special hazards," such as manufacturing risks, mills, elevators, warehouses, etc., special schedules are prepared. These, generally speaking, describe a building which is "standard" as regards construction, arrangement of processes, and fire-extinguishing facilities. For such a standard risk a basis rate is then adopted, which, in the judgment of expert raters, measures the various factors pertaining to the hazard involved. To

this basis rate certain stipulated charges are next made for defects in construction, arrangement, and fire-protection facilities, as compared with the defined standard building. On the other hand, certain deductions are made for unusually good features as compared with the standard. Deductions or charges are made also for the presence or absence of coinsurance, faulty management, exposure hazards, and other features, and in nearly all cases the penalties in the form of additions for defects are made so heavy as to furnish a strong inducement to the manufacturer for the installation of improved methods of construction and operation. A large number of such special schedules exists, many of which are very intricate and detailed. In most instances expert service, usually given by men acting for a group of companies, is necessary for their application.

In the rating of mercantile properties fire-insurance companies use a large variety of schedules, varying from the simple in small towns to the elaborate in larger cities. According to the average schedule, cities and towns are divided into classes according to the degree of fire protection afforded. Next two basis rates are adopted in each town-one for brick and the other for frame construction-each measuring the hazard for an assumed type of building in each class. In the brick schedule additions are then made for defects of construction and exposure hazard, and deductions allowed for good features. To the rate as determined up to this point, called the "unoccupied building rate," an addition is made to measure the hazard of the occupancy connected with the building. The contents of the building, on the other hand, are often rated by making an addition to the building rate as outlined in the schedule, but more frequently the contents of such buildings are grouped into from three to five classes, and an addition made to the building rate for each of these classes.

In the case of frame buildings a basis rate is adopted in

each town and city, to which additions are made covering. the occupancy and the exposure hazard. The rate on the contents of frame buildings, however, is seldom higher than the rate on the building, and in most cases is less, because the goods can often be easily removed in case of fire.

In recent years several attempts have been made to devise a schedule which can be universally applied throughout the country in rating mercantile risks. Of these attempts two deserve special mention, namely, the "Universal Mercantile Schedule," prepared by a large number of underwriters, acting under the chairmanship of Mr. F. C. Moore, and the other the "Mercantile Tariff and Exposure Formula for the Measurement of Fire Hazards," designed by Mr. A. F. Dean, of Chicago. While these two schedules present many vital differences, their object is to furnish a basis of rating mercantile risks which can be applied to all mercantile properties, no matter where located. The Universal Mercantile Schedule, or a modified form of it, is now used in many of our largest cities, such as New York, Philadelphia, Cleveland, and others, while the so-called Dean Schedule is used widely in a number of Western states.