Mathematical Limits to the Judgement Factor in Fire Schedule Rating

E. G. Richards has stated: "If experience is to measure fire insurance costs, it will show that the rate upon a specific risk should be the same as the average rate of its class." Mr. Richards continues to the effect: "By the [schedule rating] method the charge or credit for each separate part or use of a risk is of necessity theoretical, its cost being purely an estimate unsubstantiated by actual experience, because no way has yet been discovered for subdividing the underwriter's outgo into separate parts corresponding to the separate structural parts or uses of the risk as provided for in existing rating schedules. ''More recently, Longley-Cook has summarized the schedule rating process thusly: "A schedule rating plan with numerous credits and debits for favorable and unfavorable features may be established." Rate level adjustments, based on loss ratio developments will be made to insure the overall adequacy of the rates, but the individual debits and credits continue to be based on judgment alone. '''(Emphasis added.) These authors, writing independently some 45 years apart, have expressed a concept echoed by others and long accepted as an axiom of the fire schedule rating process, that no mathematical basis whatever exists for the individual charge or credit of the rating schedule, hence that the specific rate of the individual schedule-rated risk must rest solely upon judgment.