The fire insurance rates are determined by three ways: 1. Personal judgment, 2. Tabulated experience and 3 by schedule.
1. Personal Judgement Rating :
This method was the first to be generally used. Under this method, the rates so made indicate the opinion or judgement of the rate makers. The judgement is the result of the experience and observation of many years.
The rates made were equitable. No attempt was made to take account of minor differences. All the good features and all the defective features were put together and the rate was calculated by differentiating from the average premium.
Since the personal judgments differ greatly, different rates may be determined to the same risk. With the increasing complexities of modern properties, the shortcomings of this system became more and more apparent.
This method may create dissatisfaction amongst the policyholders because of different premiums to the same type of properties. Now less reliance is placed upon personal judgement in making rates.
2. Experience Rating:
The method is not essentially based upon judgement. The combined judgement of a large number of individuals is taken into account. It is based on the experience of several years and of several persons.
Therefore, it reflects a reasonably accurate treatment of the various elements to measure the fire hazard. Under this method, the risks are classified according to their loss experiences.
This system may not be practical as so many classes of risks would be necessary. The experience collected in the past will be of no great value in the future. However, rates made on this basis may more correctly be utilised as compared to that of other systems.
3. Schedule Rating:
Under this method, fire hazard is separated into various elements and each element is assigned a particular value. The schedule describes a property as ‘Standard’. For each standard risk, a standard premium is assigned.
To this basic rate or standard premium, a certain stipulated charges are made for defects in construction and arrangement of property and certain deductions are made for unusually good features as compared with the standard.
The advantages of the schedule rating system are that it provides more equitable treatment of all insured. Due to the systematic treatment of the risk, the premium rates come approximately the same.
The second advantage is that it reduces friction between the company and the insured because the insured is able to understand how his rate is made in every case.
The third advantage is that it tends to reduce the Fire Waste because it encourages proper construction of buildings by intelligently charging for deficiencies from standards and recognizing exceptionally good construction by deductions. The fourth advantage is that it secures more thorough inspection and rating.