A burning question: as the suburbs sprawl even farther, homeowners insurers are adding new factors into their underwriting consideration.

In the fiercely competitive homeowners line, insurance companies these days are focusing more on identifying the hazards that a risk is exposed to before they spend underwriting dollars to inspect the site and determine coverage.

This approach can be very important in evaluating fire peril, especially for newly built, higher-end housing in suburban and rural are-as where development is burgeoning. In a 2001 study, the Insurance Services Office, Jersey City, N.J., reported that areas graded at the lower end of its fire protection scale--generally, more suburban and rural locales--have seen home values rise faster than those areas with better fire classifications. Furthermore, from 1994 to 1998, the average amount of homeowners insurance being purchased in those areas had been growing 14 times faster than in better protected communities, ISO said.

"In the past, insurers built their property rating systems around field inspections and replacement cost calculations--and that's still important;' said Pat McLaughlin, senior vice president of ISO's Risk Decision Services Unit. "But times have changed. Insurers underwriting a half-million-dollar risk want to know if it's in an area with fire hydrants, is exposed to high winds or storms, or has a history of water damage claims, and they want the information before they spend money on an inspection or valuation," he said.

The technology to provide this kind of information has been available for years, said Charles Sharp, a Morristown, N.J.-based consultant to Marshall & Swift/Boeckh, which provides building cost data, sourcing solutions, estimating technology and geographically based underwriting data to the property/casualty industry. "But I think that people have been waking up to it only in the last year or so," he said.

In fact, it was industry demand that prompted M&S/B recently to make its data on California brush-fire areas available to that state's homeowners market. The M&S/B system takes an address, converts it into a latitude and longitude, then sees where it falls relative to areas of brush, Sharp said. "Using satellite imagery data--down to a square the size of a baseball diamond--you can get very specific about whether there's brush there or not," he said. "So the concern is less that a 5,000- or 10,000-gallon pumper is available, but if this house is in the middle of dried brush--the hazard becomes critical."

Assessing Fire Protection

Rapidly changing technology in the past decade also has served to reinforce the value of ISO's Public Protection Classification code, McLaughlin said. To assess fire protection and thereby calculate premiums, homeowners insurers have long relied on the PPC system, which was initiated by the property/casualty industry almost a century ago and is now maintained by ISO.

The ISO experts collect information about municipal fire-protection efforts in communities throughout the United States. Then ISO analyzes the data--from the handling of fire alarms and the adequacy of the water supply to the equipment at a given fire house--and assigns a PPC number from 1 to 10. Class 1 represents exemplary fire protection, while Class 10 indicates that the area's fire-suppression program does not meet ISO's minimum criteria. ISO estimates that 57% of U.S. fire districts fall into the Class 7-10 range, down slightly from 62% a few years ago.

"The PPC program is supported by insurers and communities alike because it provides an incentive for communities to improve the quality of their fire services," McLaughlin said. "And on the insurance end, because PPC is a reliable predictor of loss, insurers are likely to write more business and write it at lower premiums in communities that have better fire protection. It supports good public policy and is good business."

A number of cities and towns plan improvements based upon maintaining their PPC grade, he said. For example, residents of Las Vegas, graded Class 1, recently approved a $551 million tax initiative to build three new fire stations, replace an aging fleet of fire apparatus and hire nearly 100 firefighters--expenses contemplated in part to safeguard the city's top fire-services rating. A survey that ISO commissioned in 2000 showed that of the more than 500 fire chiefs and other officials queried, 59% said that in the previous rive years they had used the PPC program in planning for, budgeting or justifying improvements or changes in their community's public fire protection, and 69% said they planned to use the program that way in the next three years, McLaughlin said.

Now, the introduction of GIS, the Geographic Information System technology, has enhanced the value of the PPC system, meaning an address can be mapped, and its proximity to the nearest fire station, water main or fire hydrant can be quickly established, he said.

"With the old way of doing business, somebody sat down with a manual and tried to figure out which fire district the insured property was in," McLaughlin said. "But fire districts and response areas don't always match up with ZIP codes, and automatic aid agreements often cross community boundaries."

ISO also has been able to use technology to better match addresses to fire districts. That's particularly important in communities rated on a split-class basis, with risks within 1,000 feet of a recognized water source receiving one grade and risks that are not, another grade, he said. The 1,000-foot requirement has to do with the usual 1,000 feet of hose on a normal response fire truck.

"Technology has unleashed the value of PPC information," McLaughlin said. "Information that couldn't be tapped before is now being integrated into systems for marketing, underwriting and rating. And it can be done relatively quickly, easily and inexpensively."

Looking at All the Factors

But in the view of Jeffrey L. Kucera, an actuarial consultant at Pinnacle Actuarial Resources Inc., the industry could go even further. He thinks that insurers need to challenge themselves to find new and better ways to rate the individual perils of homeowners insurance. "They also have to look for more traits directly related to the individuals living in the home," he said.

Until the introduction of credit scores, most homeowners insurers had no elements in their rating plan that considered who occupied a dwelling, Kucera said. "There was nothing that distinguished the actual occupant risk, as all the rating characteristics were based strictly on the house--not that those aren't important, because they are--but equally important is who is living in that home because they will possess characteristics which affect the losses, similar to car drivers," he said. These characteristics can include a ready attention to making repairs or a lackadaisical attitude about fixing what's wrong, he said.

This approach is akin to the credit-based scoring used by many auto insurers to identify the risk level of applicants, based on industry studies that have shown that a policyholder with a good credit rating is less likely to file claims.

Looking for More

Kucera, who has more than 25 years of experience in the industry and formerly was an assistant vice president at All-state Insurance Co., has been working as a consultant with a number of insurance companies on the homeowners front. "We recommend they begin looking at factors that historically they have not used for a rating," he said. "This is frequently done by appending information onto their data from external sources so we can then evaluate these new characteristics as they relate to potential losses."

He has encouraged homeowners insurers to consider the picture from a multivariate instead of a univariate standpoint. Historically, insurers have looked atone rating variable at a time, he said. "But if you're looking at one at a time, you can be double counting certain things and masking others because of the interrelationship between variables," he said. "Multivariate analysis is a statistical method using something called generalized linear modeling, which looks at all variables at the same rime with the understanding that there is a correlation between some of them."

As a result, he is able to tell homeowners insurers that they may be giving too much of a discount to policyholders, or charging too much for some segments of their policyholders, he said.

Kucera noted that homeowners insurance was the first multiline policy sold in the United States and was a combination of fire, extended coverage, theft, personal liability and medical policies, which previously had been sold separately. When the first homeowners policy was filed in Pennsylvania in 1950, the fire peril was all-important. Today, fire, while still a major portion of the homeowners policy, does not dominate losses the way it did 50 years ago, Kucera pointed out. The incidence of other perils, including water losses, liability claims and theft losses has increased over time, but that has not been the case with fire peril, he said.

With that in mind, he and his associates also are encouraging insurers to look at their homeowners data on a peril-by-peril basis--meaning insurers should consider what rating factors are important for fire, liability, water and theft coverages. "Some of the items that are important for one peril, may not be at all important for another," he said. Using the PPC code, for example, would measure fire protection in an area, but probably would have little or no relationship to liability losses, Kucera said.

"It's a way of refining your rating plan--and the goal of any rating plan is to get the most accurate measurement that you can in trying to predict future losses," he said.

Cost of Homeowners Insurance Fire Claims

On average, per $1,000 of insured property, communities in the worst fire protection classification (No. 10) had homeowners fire losses more than twice as high as communities in the best classification (No. 1). *

[GRAPHIC OMITTED]

* Based on premium and loss information that insurers reported to ISO. Excludes data from statistically rated cities. Out of more than 45,000 fire districts in the United States, only 49 communities have achieved a PPC of 1. Therefore the data sample for Class 1 is not statistically credible.

Source: Insurance Services Office

Historical Fire Incidence

Better fire protection, improved
construction and the installation
of smoke alarm systems in houses
have combined to reduce the
number of fires overtime.

Year             Housing          U.S.   No. of Fires
           Units for the   Residential      Per 1,000
       United States (1)     Fires (2)          Homes

1988         103,653,000       552,500          5.330
1989         105,729,000       513,500          4.857
1990         106,283,000       467,000          4.394
1991         107,276,000       478,000          4.456
1992         108,316,000       472,000          4.258
1993         109,611,000       470,000          4.288
1994         110,952,000       451,000          4.065
1995         112,655,000       425,500          3.777
1996         114,139,000       428,000          3.750
1997         115,621,000       406,500          3.518
1998         117,282,000       381,500          3.253
1999         119,044,000       383,000          3.217
2000         119,628,000       379,500          3.172

Sources: (1) U.S. Census Bureau; (2) National Fire
Protection Association; Pinnacle Actuarial
Resources Inc.

RELATED ARTICLE: Making the Grade.

Last year, the Insurance Services Office processed 35,000 changes to its database relating to the status of fire protection services in the nation's communities. These changes included new fire stations, new territorial boundaries through the annexation of one locality by another, new automatic aid agreements and the extension of fire hydrants into newer communities or newer areas.

"Of all those changes, probably the most significant one is the amount of effort and money that communities are putting into extending fire hydrant water mains out into the suburban areas and rural areas," said Pat McLaughlin, senior vice president of ISO's Risk Decision Services Unit.

This access to water can include what ISO calls an "alternative water supply," such as ponds and pools where a fire department with the correct equipment could tap into the water if a fire hydrant is not accessible.

ISO uses a manual, called the Fire Suppression Rating Schedule, to review the firefighting capabilities of each community. The best grade in ISO's Public Protection Classification is Class 1; the poorest, Class 10. Here's how the schedule works:

* 10% of the overall grading is based on how well the fire department receives and dispatches fire alarms. This means looking at a community's communications center, the number of operators there, the telephone service including the number of lines coming into the center, the listing of emergency numbers in telephone books and how the center notifies firefighters about the location of an emergency.

* 50% of the overall grading is based on the number of engine companies. The review covers distribution of fire companies throughout the area, how often pumps are tested, and how many nozzles, hoses, breathing apparatuses and other pieces of equipment are available. ISO also reviews department records on type and extent of training for fire personnel, numbers trained, firefighter response to emergencies, and maintenance and testing of fire department equipment.

A consideration in pricing a homeowners policy is the proximity of a home to the nearest fire station. The preferred distance is five miles or less, based on a Rand study that calculated that at an average speed of 35 mph, a fire truck five miles or less from a fire could reach the site within the 9.2 minutes it takes to reach flashover, or the critical point when a fire intensifies and everything in a room becomes combustible.

* 40% of the grading is based on the community's water supply--whether it is sufficient for suppressing fires beyond daily maximum consumption. Pumps, storage and filtration are examined. The rate of flow of water mains is checked at certain locations in the community and a count is made of the distribution of fire hydrants no more than 1,000 feet from these locations.

Insurers used to regard the PPC program solely as a way of getting the protection class on a property in order to charge the right premium, McLaughlin said. But in recent years, many property/casualty companies, especially the larger ones, have been expanding their use of this system for personal and commercial lines, he said.

"First, they are employing it as a way to determine where they tan write more business--where there might be better protection on the fire side and therefore better loss experience," he said. "Second, they're using it to obtain or verify critical information on an individual risk basis. And they use it to perform a portfolio analysis of their property book to see exactly how much money they have at risk in protected and unprotected areas."

Insurers also are using this system to look at individual rating territories, factoring that in with all the other causes of loss, whether it's water claims or wind claims. In the end, insurers need to understand the experience they're getting on an all claims basis," McLaughlin said.

"And last, and most traditionally, they're using it as a pricing variable for homeowners, for commercial property business owners and business interruption," he said.

RELATED ARTICLE: When Being Close Counts.

On an industrywide basis, the Insurance Services Office rates fire peril as the No. 1 cause of loss in claims dollars. In the past decade, fires have caused direct losses of more than $120 billion and countless billions more in related costs, said ISO, a nonprofit corporation which is a major source of data on industry operations.

Furthermore, every year in the United States, fires kill more than 3,000 people and injure more than 20,000, the organization said.

To individual insurers, however, ranking fire peril in the scheme of all homeowners perils depends upon their books of business.

"A small company in Florida would probably say its biggest loss exposure is wind," said Pat McLaughlin, senior vice president of ISO's Risk Decision Services Unit. "Ask the same question on the West Coast and it might be earthquake. In the middle of the country, it might be severe thunderstorms or hail."

For example, John Tierney, president of Bunker Hill Insurance Co., Boston, said fire losses run fourth for his company behind losses from weather, water and theft. In fact, in developed areas, the level of fire protection does not have that much influence on homeowners rates anymore, Tierney said. "Most towns are protected with up-to-date equipment, and the difference in prices from one level of protection to the next is minimal, in part because fire fortunately has become a much smaller part of the losses associated with homeowners insurance," he said.

This means that better fire protection, improved construction and the installation of smoke alarm systems in houses have combined to reduce the number of fires over time and to reduce the impact of fire losses on the overall homeowners premium, Tierney said.

Fewer than 5% of Bunker Hill's customers in Massachusetts have homes in areas that are classified as "unprotected," he said. This is a category provided by the American Association of Insurance Services, based in Chicago, which breaks down fire risk into three classifications--I fully protected, partially protected and unprotected. Fully protected basically means that the risk is within five miles of a fire station and within 1,000 feet of a hydrant. Partially protected indicates a home falls within the five-mile category but is more than 1,000 feet from a hydrant, and unprotected means the home is greater than rive miles from a fire station.

Beyond Fire Hydrants

The picture is different for Chubb Group of Insurance Cos., which specializes in insuring high-value homes. To Chubb, the level of local fire protection is very important, said Denise Melick, national appraisal manager. The insurer lists fire as second only to water loss among the top perils in its homeowners line, she said.

"Certainly, protecting homes in rural areas is a definite challenge and we're seeing more and more high-value homes being constructed in rural areas," Melick said. Chubb has its appraisers visit the homes that it insures and work closely with the homeowner and local fire department to draft a plan for fire fighting at that location, she said. "Oftentimes, we will meet with the fire department and evaluate its equipment as well as a water source that might be available nearby," Melick said.

Since many rural areas don't have public fire hydrants, Chubb will consider the use of swimming pools, streams and ponds. In some cases, the insurer also will recommend that a homeowner install a water source--a pond or a pool--on the property so the water can be used for fire-fighting purposes, she said.

If a water source is Included as part of the construction process, it's important that it be sited near a road surface, Melick said. "So we'd want to make sure from an engineering standpoint, that the pool or the pond or a standpipe connection to one of those water sources is readily accessible from a hard-road surface," she said. "We don't want the fire truck to have to drive 100 feet onto the lawn to have to get to a pool. We're going to want that connection to be right there on the road."

Typically, Chubb wants to visit the construction site as soon as possible to evaluate factors like that, she added.

Chubb maintains a database of the fire departments and the towns that its appraisers have frequently visited "so we have a good indication of who the contacts are, what their manpower response is and the exact equipment that they bring," Melick said.

A new development is the growing reliance on tanker trucks in rural areas, she noted. In western New Jersey's Hunterdon County, where many rural areas have seen an upsurge in development of higher-priced homes, fire departments that can't hook hoses into hydrants to fight blazes have turned to tanker task forces instead. "Departments will have an agreement that if there is a structure fire or a working fire in a particular area, a number of tanker trucks from throughout the county will respond, and they will be able to accumulate a significant amount of water that way," Melick said. "They can do a shuttle back and forth to water sources and refill the tankers, but keep a consistent flow of water on a fire."

Improving the Grade

Tanker shuttles have long been recognized in the ISO grading criteria. Now, ISO has introduced another classification to distinguish even minimal improvements in this area, McLaughlin said. "Many fire departments and insurance companies have been looking for ways to credit the Class 9 communities that don't have water systems, but have made an investment in the water-tanker and shuttle program," he said. "So we introduced a classification called 8B, which recognizes the distinction in a way that provides an incentive to communities." In ISO's rating system, Class 1 represents exemplary fire protection while Class 10 indicates that the area's fire-suppression program does hot meet ISO's minimum criteria.

To earn points here, ISO stipulates that a tanker system must be available 365 days a year, provide a minimum of 200 gallons per minute over a 20-minute period, and be ready to start supplying water within five minutes of arriving on the scene.

One of Chubb's greatest concerns is the response time of the fire department. If firefighters can reach a site in a timely manner, there's a good chance of saving a home, Melick said. That's why the insurer encourages customers building new homes in rural areas to install a residential sprinkler system, which is designed to contain a fire until firefighters arrive--an important assist if a fire truck has to travel a great distance to answer the call, she said.

RELATED ARTICLE: 'Do-it-yourself' evaluations.

Although the Public Protection Classification code has long been an industry mainstay in evaluating the level of fire protection in the nation's communities, some homeowners insurers are overlaying this system with their own enhancements or using another method entirely in a bid to cut costs and achieve a competitive edge.

"Of the things that I've seen out there, I think that's going to be the biggest shift,' said Charles Sharp, an independent consultant to Marshall & Swift/Boeckh, referring to what he sees as a trend away from heavy reliance on the PPC, which is administered by the Insurance Services Office. "The reality of it is--and most people are realizing this now--there is really only one factor that determines whether a risk will be saved or not and that's how fast you get the hose in the front door"

Sharp pointed to State Farm Group, the nation's leading homeowners insurer, as a major company that is taking a different approach to assessing community fire protection.

State Farm's proprietary program, Sub Zone rating, was introduced beginning in October 2000 on a state-by-state basis as the company implemented rate changes, said spokesman Kip Diggs.

"Because we are the largest insurer and we do have the database, we basically just rely on out own local experience to do the rate setting, completely bypassing" ISO and other organizations that provide community firefighting evaluations, Diggs said.

"We believe by using our own data and our own loss experience, we can reduce our operating cost and improve our ability to respond to the actual claims cost trends in a particular area:' he said. "And the savings there will ultimately find their way into the prices out" customers pay."

Sharp said a number of the newer online insurers also are finding other methods to evaluate fire safety in communities. One is Homesite Insurance Group, Boston, which sells only homeowners insurance.

Homesite uses the system provided by the American Association of Insurance Services, based in Chicago, which breaks down fire risk into three classifications--fully protected, partially protected and unprotected. Fully protected basically means that the risk is within five miles of a fire station and within 1,000 feet of a hydrant. Partially protected indicates a home falls within the five-mile category but is more than 1,000 feet from a hydrant, and unprotected means the home is greater than five miles from a fire station.

ISO's town classifications of 1--the best possible ranking--to 10--the least prepared in terms of fire protection--were originally designed for commercial risks, said Manny Rios, vice president of underwriting for Homesite. Typically, in the rate filings for homeowners, insurers will lump these town classes together when they price, he said.

"So, you will have one rate for a town class 1-7, and then you have a different rate for 8-9, and another rate for 10" he said. "Or you might see a pricing band of a town class 14, another rate band for 5, 6 and 7, and then 8, 9 and 10."

Also, the town class system can be expensive for a company like his to maintain, Rios said. "Under compliance guidelines, you have to make sure that the policy has been updated, and some of the town classes change every year," he said.

The founders of Homesite decided they wanted a grading system that was easy to maintain, easy for customers to understand and easy for its call-center people to explain, Rios said.

With the AAIS methodology as well as added technology--the company uses a GEO code and digitized data maps from a fire station database--Homesite "can tell if you are close to an area within rive miles of a responding fire department" he said.

Homesite, which targets the preferred middle market and homes from $70,000 in Coverage A value up to $700,000 and, in some cases, $1 million, has more than 70,000 customers nationwide. Chartered in 1997, Homesite wrote its first policy in July 1999.

ISO said it has been working with a number of leading property/casualty insurers to integrate its PPC data into their systems. "Insurers are asking us to help customize PPC delivery because they've got unique rating plans and unique rating rules," said Pat McLaughlin, senior vice president of ISO's Risk Decision Services Unit.

"We know that there are companies out there that have more than 10 classes, or sometimes have classes that are different from the ones that we have," he said. "Those insurers have identified the niche or an area where they think they can avoid more losses or make more money than their competitors by looking at the business in different ways."