TECHNIQUE. THE RISK. The proper business of insurance companies is not the prevention of loss by fire, but the assumption of risk. Througn an insurance polity the risk to which the prop erty of the insured is exposed is assumed by the insuring company. Insurance in itself may have 110 effect un the Rniount of property destroyed by fire, or upon the chance of destruction to which a particular piece of property is exposed. The gain eopferred by insurance upon society arises partly from the reduction in the uncer tainty as to how much loss will lie suffered in a given period through the accumulation of a large number of risks, and partly from a distributimt of the actually suffered among a large num ber of individuals. The risk which an insurance company assumes when it insures a piece of prop erty against loss by fire depends upon several factors; viz. the value of the property insured, the probability of fire within a given time, the probable destructiveness of the fire if it occurs, and the -length of time for which the insurance is granted. The first and last of these factors are determined with comparative ease and ac curacy. The determination of the second and third, on the other hand, presents very great difficulty. So far as human intelligence is con cerned, it is largely a matter of chance whether a particular building is visited by fire in a given year or not. The adoption of preventive meas ures may reduce the probability, but some degree of uncertainty will always remain. And when there is added to that uncertainty the uncertainty as to the extent of the loss occasioned by the fire, it will be seen that there is a large element of chance in the liability which the company as sumes so far as any particular property is Con cerned. Moreover, the uncertainty is of such a nature that the chance of loss cannot be deter mined by the most careful examination of the property. The knowledge of the conditions affect ing the possibility of fire is too imperfect to admit of such direct determination. It is neces sary, therefore, to rely upon the statistics of past experience to show what chance of loss a particu lar risk brings upon the company. If statistics show that each year for a number of years fire has destroyed, upon the average, one out of every thousand buildings of a certain kind, there is one chance in a thousand that any particular building of the same character will be destroyed during the following year. The greater the num ber of cases from which the average is calculated, the more reliable is the average—that is, the less danger is there that it has been unduly affected by temporary fluctuations in the number of fires.
The experience of insurance companies them selves furnishes the most valuable data obtain able for calculating average losses. it is ex tremely desirable that the movement already under way to combine the experience of many companies, and thus calculate combined experi ence tables for fire insurance, as they have al ready been calculated for life insurance, should be carried out.
But even with the help of experience, the prob lem of calculating the risk incurred by insuring a particular building is by no means simple. in the first place, the probable destructiveness of the fire must be determined from experience, as well as the probability of the occurrence of the fire. in the second place. the problem is made more complex from the fact that no two pieces of property present precisely the same fire fea tures. if the term may be used. To group them in classes at all it is necessary to overtook many minor points which may still have some influ ence on the degree of risk. Even when this is done, the necessary nnmber of classes is very great. The Home Insurance Company, which has kept a careful record of its fire experience dur ing an existence of nearly fifty years. has found it necessary to make more than 150 classes of risks. The process of arranging risks in groups according to the chance of loss to which they are exposed is known as the classification of risks. It is a matter of great importance that this classification should be as accurate as possible. It is of importance to the companies, because a general underestimating of risks must result in loss to them; it is of importance to the insured, because imperfect classification means an unjust distribution of the burden of insurance. If any kind of property is put in a more hazardous class than it properly belongs in. the owners of that property contribute more than their share to the cost of insurance. Farmers, as a class, for ex ample, believe that farm property is thus un justly classified by the large insurance companies, and that rates on such property are higher than they should be. It is that belief which is partly responsible for the spread of small mutual com panies among them. The fire experience of these mutual companies lends some support to this claim.