SUGGESTIONS FOR RATING RISKS IN FOREST 

 INSURANCE 



By W. N. Sparhawk 



Forest Examiner, U. S. Forest Service 



GENERAL PRINCIPLES 



The fundamental principle of insurance is the distribution of losses, 

 in accordance with the law of averages, so that the burden of loss does 

 not fall lieavily on the individual. In theor>% for each individual risk 

 there is paid in annually a sum which represents its probability of loss, 

 plus its share of the cost of doing business, and in the case of com- 

 mercial insurance, a small margin for profit. From these pooled pay- 

 ments are paid out sums to cover the actual losses of individuals and 

 the expenses of the business. The probability of loss, then, determines 

 the rate of premium for each insured risk. 



To be satisfactory, rates for any kind of insurance must meet three 

 essential qualifications. These are : 



1. Adequacy: they must be high enough to cover all losses and legiti- 

 mate expenses, and in case of commercial companies, a reasonable 

 profit, but should not be any higher. 



2. Fairness : it is obvious that extremely hazardous risks should 

 pay a higher rate than safer ones. Risks should be so groui)ed and 

 classified that each class is normally (except in case of conflagrations) 

 self-sustaining. 



3.*Consistency : risks of equivalent hazard should have the same 

 rate. 



DEVELOPMENT OF RATING SYSTEMS 



In the early history of commercial fire insurance, rates were based 

 altogether on judgment, and were very crude and unsatisfactory. 

 Only within about the last half century have there been attempts to 

 classify and rate risks scientifically, that is, on the basis of actual 

 chance of occurrence of fires and of probable loss from such fires. 

 A thoroughly scientific rating has not yet been developed, because of 

 inadequacy and inconsistency of the fire records, and above all, because 

 there has until recently been no central organization to standardize 

 records. 



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