704 JOURNAL OF FORESTRY 



Rating. 



Rates are determined as follows : 



1. A basic composite rate for the United States is obtained by 

 dividing the sum of the losses and expenses of all companies, plus 5 

 per cent for profit, by the total insurance in force. A 10-year period 

 was tentatively adopted for this purpose. 



2. Basic rates for individual States are obtained in a similar manner, 

 except that conflagration losses are prorated over all States. This 

 gives the average cost for all classes of risk in each State. 



3. The United States rate for each class of occupancy is found by 

 dividing the losses for the class over a 10-year period, by the total 

 writings for the class, which gives the loss-cost, and adding to it a sum 

 corresponding to the average rate of expenses to losses over one or 

 more years, plus 5 per cent allowance for profit. 



4. In a similar manner the United States rate for each class of 

 external or internal exposure, or both, is determined, and added to the 

 occupancy rate. 



5. This sum is then modified for the particular State where the risk 

 is located, by the ratio which that State's base rate bears to the United 

 States base rate. For instance, if the State base rate was 0.9 of that 

 for the country as a whole, the rate for a particular class of risk in that 

 State would be 0.9 of the United States rate for the class. 



Under this plan, each State bears the cost of insuring its own risks. 

 except in case of conflagrations, which are spread over the whole 

 United States. The reason for making a division according to States 

 is that different States have different laws, differences in climate and 

 physiography, differences in character of population and in public 

 attitude toward fires. It would obviously be unjust for the people of 

 a State with especially good fire laws, backed by a sound public attitude 

 on the fire question, to have to pay the same rates as those of a State 

 with laws and public sentiment which almost encourage fires. It is 

 believed that one effect of this system will be that States with unduly 

 high rates will take steps to reduce them, through better fire laws, 

 better law enforcement and careful investigation of the causes of fires. 



"The Experience Grading and Rating Schedule is based upon a 

 theory of measurement of hazard by statistical results while the 

 Analytic and Universal Mercantile systems were elaborate and care- 

 fully designed applications of the combined judgment theory. The 

 former is inevitably superior to the latter two if capable of overcoming 



