September 27, 2012 by Michael Currie
Fire insurance grades have been used by Canadian insurers for more than 100 years, however until now, they were only available to underwriters and actuaries. Fire Underwriters Survey (FUS), the group responsible for determining the fire insurance grades, and publishing the Canadian Fire Insurance Grading Index has made several significant leaps forward in recent years and has incorporated several technologies. One recent change allows subscribing underwriting companies to sponsor brokers that they wish to access the Canadian Fire Insurance Grading Index on their behalf.
As numerous brokers now have access to the Canadian Fire Insurance Grading Index, this is an excellent time to provide a summary of the importance of the fire insurance grading system, how the fire insurance grades are determined and what they mean.
The fire insurance grades were originally developed as a tariff system that was used by insurers (members of the Canadian Fire Underwriters Association) to provide reduced insurance rates in areas where standardized and recognized fire protection levels were in place. Originally there were five classes/grades of towns, ranked according to their fire protection, as follows:
Over time, the system for measuring fire protection has evolved. Not all communities are built in the same way with the same level of risk, and as such some communities require more resources to be considered adequately protected than others. Particularly, as communities grow, the need for increased resources for fire protection increases. Also, as the technology became available, emergency communications systems have become a key link in the chain of fire protection. Fire prevention programs, including implementation and enforcement of building and fire codes, were determined to play an important role in the degree of fire losses any community experienced. The fire insurance grading system is periodically evaluated to determine if it reflects new research and findings related to the fire protection industry.
The fire insurance grading system now consists of five separate measurements: 1) risk level (with respect to fire loading and geographic distribution of risk); 2) fire suppression; 3) water supplies for public fire protection; 4) emergency communication; and 5) fire prevention – safety control.
It is important for Canadian insurance brokers to understand that there are no requirements for fire protection in Canada. Cities are not required to provide fire departments or staff them with fire fighters. Fire departments are not required to meet any national standard for deployment of resources or training for fire fighting. Water supply systems are not required to provide any specified amount or flow rate of water. This is all done voluntarily and the degree to which any community invests in fire protection is strongly influenced by the discounts offered by insurers as a result of the fire insurance grades.
Because communities are directly motivated to improve service levels to the levels that are recognized by the insurance community, it is critical that the insurance community is diligent in ensuring that discounts on property insurance are only given as warranted by the fire insurance grades.
The fire insurance grades are specifically developed for the Canadian insurance community to provide a standardized measure of the adequacy of fire protection in every community in the country. Many brokers have developed a practice of calling the fire department to inquire as to the level of service that the department provides. This is a flawed approach for several reasons. Firstly, the conversation does not have a framework of defined terms of reference. So an insurance broker might ask, “Are you a career fire department?” and the answer might be very unclear, because the insurance broker and the fire chief do not have a common term of reference for what a “career fire department” is. In many cases a fire chief will answer yes, because there are 10 career members, but in fact this is not a career department. Furthermore, the fire department has a vested interest in telling the insurance broker that it is career, because this will result in better discounts throughout the community.
Commercial Lines Insurance
The system of fire insurance grading and the associated index for commercial lines is called Public Fire Protection Classification (PFPC). The system is a score between one and 10, where one represents the highest standard of fire protection and 10 represents no recognized level of protection. The system is a measure of the community’s ability to handle large scale fires, such as those in apartment buildings, industrial complexes and densely built-up areas where multiple buildings may be involved in a fire.
The PFPC is determined by measuring the level of fire risk in the community and setting that risk level as a benchmark. The four areas of fire protection capacity (Fire Suppression, Water Supplies, Emergency Communication, and Fire Prevention – Safety Control) are then measured against the benchmark that was set in the risk assessment.
This system is ingenious because it provides a uniquely appropriate measurement scale for every community. If a community is small and has a limited fire load, then the community is measured against its ability to respond appropriately. Conversely, if a community is large and has significant densely built upon areas, then the community is measured against its ability to respond to much larger fires.
The PFPC system measures 500 different sub-categories across the four areas of protection and weights them according to their relative importance in terms of successfully combating fires and saving property. The final number between one and 10 gives a standardized measure of the level of fire protection relative to the level of risk in the built environment.
One important side note, for there to be a PFPC Classification superior to nine, there must be recognized water supplies for fire protection. Normally this means that hydrants will be used to deliver fire flows, however several communities have developed alternative means of reliably delivering fire flows, such as accredited “Superior Tanker Shuttle Service” and accredited “Large Diameter Hose Lay.” These alternative systems go through the same rigorous testing and evaluation as hydrant systems and are accredited by Fire Underwriters Survey, however it is important to note that there are a wide range of different levels of service that can be recognized.
Every element that is measured in the fire insurance grading system is measured on a scale of 0% credit to 100% credit. With respect to water supplies, the 0% credit point is any amount of water less than one hose stream (200 Imperial gallons per minute or Igpm) and the 100% credit point is the benchmark Required Fire Flow (or “Basic Fire Flow”) of the community. So if a community or a building has a Required Fire Flow of 2,000 Igpm, and can provide 400 Igpm through a hydrant system or accredited Superior Tanker Shuttle Service, then the community would receive 25% credit in this category of the grading. Note that the ability to deliver Required Fire Flows is the most heavily weighted portion of the grading.
Personal Lines Insurance
The Dwelling Protection Grade (DPG) system was developed specifically for personal lines insurers. This system is only intended to be used for “typical dwellings” that do not exceed two storeys or 3,600 sq ft total floor area excluding basements. Often the Dwelling Protection Grades have been colloquially referred to as the “Town Grades.” This is not recommended because it can result in confusion between the PFPC and the DPG systems. The Dwelling Protection Grade system is a measure of the community’s ability to respond to fires in detached dwellings and to have a reasonable opportunity to save property. The grades are broken into the following: DPG 1, Fully Protected, Career Response; DPG 2, Fully Protected, Composite Response; DPG 3A, Fully Protected, Auxiliary Response; DPG 3B-S, Semi Protected, Auxiliary Response, Superior Tanker Shuttle Service; DPG 3B, Semi Protected, Auxiliary Response, Standard Tanker Shuttle Service; DPG 4, Limited Protection; DPG 5, Unprotected.
The important thing to remember with applying discounts associated with each grade improvement is that each grade improvement represents a significant improvement in the level of service and the associated chance of saving property. It is also important to remember that the chance of saving property goes down with the length of time of the response and drops dramatically after responses become excessively long. In Canada, the maximum recognized response for commercial lines is five kilometres by road and for Personal lines it is eight kilometres by road. Responses beyond these maximum distances are not recognized by Fire Underwriters Survey due to the low probability of saving property.
Changes to the Index
In 2012, Fire Underwriters Survey established a new program to improve the efficiency and accuracy of the underwriting model and allow brokers to access the Canadian Fire Insurance Grading Index on behalf of underwriters that sponsor them. The system requires that brokers sign a sponsorship and data usage agreement that verifies that the information collected from the Canadian Fire Insurance Grading Index will only be used on behalf of the insurance company that sponsors them.
Over the decades, the grading system and index have become increasingly sophisticated and now have been completely digitized and converted into a geo-database. This project included the collecting and geo-coding of layers that include municipal/administrative boundaries, fire hall locations and postal code geo-centres. Now, through the interface in the Canadian Fire Insurance Grading Index, underwriters and sponsored brokers can type in any community name or postal code and receive the full fire response characteristics and applicable fire insurance grades to the area.
The results currently may be split and include, for example, one grade for hydrant protected properties and one grade for properties without hydrant protection. In such cases, the underwriter or sponsored broker must verify the distance from the structure to nearby hydrants, and in some cases also determine which water supply system nearby hydrants are attached to. When in doubt, underwriters and sponsored brokers are encouraged to contact FUS directly for answers as FUS has collected hydrant and water system data for more than 100 years across Canada and can usually provide accurate answers from archived maps and records.
To further improve underwriting efficiency and accuracy, FUS is currently working to add an address search engine to the Canadian Fire Insurance Grading Index and is also working to geocode all hydrants and water systems across Canada. As these tools are added to the various areas across the country, the answers provided through the grading index will become more risk specific and, in the end, our goal is to provide one fire insurance grade for every risk in Canada.
Michael Currie is the National Technical Director for Fire Underwriters Survey and can be reached at 1-800-665-5661 or firstname.lastname@example.org.
Copyright 2012 Rogers Publishing Ltd. This article first appeared in the June 2012 edition of Canadian Insurance Top Broker magazine.
This story was originally published by Canadian Insurance Top Broker.