Fire Protection Classification of Homeowners Insurance

For many years the Insurance Services Office (ISO) has classified the fire protection offered by communities for all but the largest cities based upon a complex engineering study of communities’ fire departments, water pressure and availability, and communications facilities. These protection classes are used in making rates for homeowners insurance and commercial property insurance. With regard to homeowners insurance, this classification system is effective in distinguishing protected from unprotected communities, and the loss experience is consistent with those results. However, among protected communities the IS0 protection classes appear to be less effective at grouping communities in appropriate classes consistent with loss experience. This paper introduces a methodology which performs the assignment of protection classes and the determination of protection class relativities in one step. This methodology uses actual homeowners experience in conjunction with engineering studies to determine protection class assignments. In using this method, a concept called “partial loss ratio” will be introduced. The partial loss ratio utilizes fire losses with the total adjusted homeowners insurance premium to derive a measure of fire loss experience. It is this experience that is used to develop protection classes and protection class relativities.