BILL KANG
Courtesy International Association of Fire Chiefs
For many years, the fire service has been dependent on the insurance industry to provide a graduated standard to determine a community’s fire-fighting capability. Fire departments depended on these standards to provide useful planning information. Now the creditability of the standard’s usefulness is under scrutiny due to changes among one of the world’s largest property insurance companies.
The Insurance Service Office (ISO) developed a long-standing rating system called the Fire Suppression Rating Schedule that grades a community’s fire-fighting ability. This schedule is based on a grading system known as the Public Protection Classification (PPC). The PPC rates a community on three factors: how well the fire department receives alarms and dispatches its resources, the number of engine companies and the amount of water required for incidents, and the community’s water supply. Significant emphasis is placed on a community’s ISO rating. This rating is generally used by property/casualty insurance companies to establish residential insurance rates. In the fire service, this rating has been used as a tool by fire departments to use in strategic planning and fiscal considerations.
Late in 2000, State Farm Property/Casualty Insurance Group abandoned their use of the ISO PPC. They have developed their own rating system known as the Subzone Rating Factor. This system is based on State Farm’s prior claim experience for many types of insured losses including fire, wind, hail, water damage, theft, and liability.
State Farm estimates that 70 percent of claims paid under their Homeowner’s Program are deemed non-fire losses. Hence, this rating system emphasizes an all hazards approach to contend with property loss. Additionally, the Subzone Rating Factor’s zones are based on the five digit zip codes.
State Farm will use its loss experience to assign subzones to zip codes and then establish subzone rates. The purpose of the Subzone Rating Factor system is to reduce operating costs, respond more rapidly to local claim trends, and ultimately save money for State Farm customers. The system is based on past experience and does not consider assessed capabilities. Therefore, improvements in fire service capabilities theoretically have a beneficial effect on local rates under this plan. Similarly, improvements in police protection theoretically have an indirect effect on local rates when considering theft loss.
As of January 15, 2001, the plan has been introduced in the following states Illinois, Texas, Oklahoma, Pennsylvania, Arizona, Minnesota, Nevada, New Mexico, Vermont, and Wisconsin.
This policy shift by State Farm is significant to the insurance industry. Standard and Poor’s Insurance Profile describes State Farm Property/Casualty Group as "by far the largest property-casualty group in the world." The homeowner’s insurance represents 20 percent of State Farm’s business operations. Additionally, State Farm insures approximately 20 percent of all residential properties in the United States. It is unclear how this policy shift will affect the rest of the industry.
This policy is designed to affect State Farm’s premiums and may have a cascade effect on other insurance companies in the interest of market competition. The industry question is if other insurance companies will follow State Farm’s lead and abandon the ISO PPC or continue to use the ISO rating system.
ISO is currently working on enhancements to their PPC program. With four major insurance companies testing the enhanced PPC program, ISO is upgrading insurance company’s ability to access and integrate PPC information into local information systems. ISO has also conducted a study of the effectiveness of the PPC for determining useful information for decision-makers. ISO plans to release the results of this study in the near future.
Many fire departments across the nation use the ISO PPC as a tool to conduct strategic planning for staffing, equipment, station locations, and water supply issues. In many instances, the ISO PPC is used as a justification tool for budget considerations.
What does this shift by State Farm mean for the fire service? The ISO PPC measures a community’s fire-fighting capabilities. However, this rating was largely used by the insurance industry to determine the premium rates for residential insurance. State Farm has stated that one of the purposes of the Subzone Rating Factor is to reduce the premiums for homeowners.
Regardless of the outcome of this development, it is evident that the fire service is not in complete control of this issue and lends credence that the fire service should also have significant say in how to determine the prudent practices of a fire department’s ability to serve their community.
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