CHAPTER 2

The Fire Offices' Committee

History and objects 56. As long ago as the 18th century attempts were being made by insurers to establish some measure of agreement amongst themselves on fire insurance premium rates, particular for the cotton trade risks in Lancashire. In the 19th century, with setbacks from time to time, there was a gradual development from local to regional and then to national arrangements, with the Fire Offices' Committee (FOC) emerging, in succession to various previous committees of fire insurance offices, as the principal body sponsoring and administering such arrangements. The FOC is generally regarded as having come into existence in 1868, and by 1887 co-operation on premium rating had assumed approximately its present form of central control by the FOC, through tariffs of minimum rates for individual industries or classes of risk, of the premium rates charged by its member companies in relation to such risks. Over the years since then the FOC has established new tariffs, amended tariffs from time to time and sometimes refined or split tariffs into two or more separate tariffs. In recent years it has extended price regulation to classes of risk for which no specific tariff had been established (see paragraphs 71 and 85) but has ceased to regulate household insurance business (see paragraph 67). 57. Although the FOC was from the beginning of its existence, and still is, the instrument for operating the tariff system of minimum premium rates, the FOC had not had any formal constitution or any formally adopted statement of its aims and objects until June 1970. A constitution was, however, then adopted, in which the objects are stated as follows: (a) To promote sound practice in the transaction of insurance in connection with fire and such other perils as the Committee may decide; (b) To establish rules for the transaction of business by Members, including rules designed to reduce costs and promote economy in the transaction of such business, and to draw up standard forms of policy and other forms, and documents for use by Members; (c) To collect, maintain and circulate amongst Members such statistical or other data as may be deemed necessary by the Committee; (d) To issue and to amend tariffs of minimum rates and premiums and regulations for use in conjunction therewith for the transaction of insurance in connection with fire and such other perils as the Committee may decide and, in appropriate circumstances, to authorise departures therefrom; (e) To combat wastage by fire and other perils and promote the protection of property, general standards of safety, risk improvement and reduction in hazard and, in particular:
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(i) to establish standards for construction of buildings and encourage their adoption; (ii) to establish standards for protective and warning devices against the spread of fire such as automatic sprinklers, drencher installations and other means of protection or extinguishment, and automatic fire alarm systems and encourage the installation of such devices in compliance with those standards; (iii) to make recommendations for reducing the risk, or controlling the spread, of fire or preventing explosion in industrial and other premises particularly where hazardous processes or materials may be present; (iv) to make recommendations for the promotion of safe conditions for the use and storage of hazardous or easily damageable property; (v) to take steps to improve standards of protection against fire and other perils by public education or any other means which the Committee may deem desirable; (f) To promote and conduct research into the causes, behaviour and effects of fire and other perils; (g) To initiate or conduct negotiations and co-operate with Government and other authorities, bodies and persons.
Membership

58. Membership of the FOC is open on certain conditions to any company (other than mutual companies) transacting, or with the power to transact, fire insurance business in Great Britain or Ireland. Among the requirements which must be complied with by a company seeking membership are formal acceptance of the Rules of the FOC ('that it will forthwith give official notice of its formal assent to the Constitution of the Committee for the time being in force') and an undertaking to comply with the tariff system ('that it will apply the Tariffs, Rules and Regulations of the Committee to all existing policies (if any) on next renewal as well as to all new business'). An undertaking must also be given to 'regard all Meetings and all proceedings thereat, and all the Tariffs of the Committee and notices relating thereto, and all other papers issued by the Committee's Secretary, as private and confidential'. Applicants must also undertake to become Ordinary Members of the Fire Protection Association, to participate in the Joint Fire Research Organisation, and, if they do direct business in the areas concerned, to join the London Salvage Corps, the Fire Salvage Association of Liverpool and the Glasgow Rate and Salvage Association (see paragraphs 24 to 26). 59. Companies carrying on "fire reinsurance business in Great Britain or Ireland may on certain conditions become Associates of the FOC. But if an Associate at any time transacts direct fire insurance business in respect of any risk in Great Britain or Ireland it may be required to become a member or to give an undertaking that it will 'apply Tariffs, Rules and Regulations to all existing policies (if any) on next renewal as well as to all new business'. Members and Associates must undertake to comply with certain Rules which have the
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effect of preventing them from: transacting facultative reinsurance with any insurer established or represented in Great Britain or Ireland and accepting risks therein who is not either a Member or an Associate of the FOC (see paragraphs 127 to 131 and appendix 8). There are 35 Associate companies, 7 being United Kingdom companies and 28 foreign-based companies.
Organisation

60. The power to make decisions is generally vested in the members of the FOC and is exercised in General Meeting or by correspondence. General meetings are,held once a, week, and every member is entitled to be represented. However, much of the FOG's business is transacted by committees and subcommittees, to some of which certain powers of decision have been delegated. On the advice of consultants engaged by the FOC the number and size of committees and sub-committees have recently been reduced and work has been redistributed among them with the object of improving efficiency. A description of the present main committees of the FOG is given in appendix 4. Certain major decisions (subject to confirmation by the General Meeting) are taken by an informal committee of General Managers of tariff companies, which is not strictly a committee of the FOC (see paragraph 176). 61. The FOC has an independent Chairman, a Deputy Chairman, and a staff of about 70, who are also responsible for the administration of other committees concerned with overseas and non reference business. The staff includes 13 personnel in the Technical Department who are concerned with the examination of and reporting on building materials, extinguishing systems, sprinklers, alarms, water supplies etc and who participate in the work of 'Standards' organisations at home and abroad. There are also six sections of technical advisers drawn from the members; these are the following: Building Section . , Chemical Section Corn Mills Section Electrical Section Heating and Petroleum Section Sprinkler Section.
The present tariff system

62. The basic principle of .the tariff system operated by the FOC is that, for any risk covered by a tariff, members of the FOC must charge a premium at a rate not less than that provided for by the relevant tariff. We have already mentioned, in paragraph 58, the undertaking required of members to comply with the tariff system and to apply its Rules and Regulations; among these are Rules, contained in the General Rules for the Regulation of Fire Insurance Business, which deal specifically with the minimum character of tariff rates and which apply unless otherwise expressly provided in particular Tariffs; these are the following, . except when otherwise stated all rates are the minimum rates to be charged per cent per annumRule 22. The Tariff rates are to be charged for all risks to which they are applicable without any discount or allowance whatever, except such as is, or may be, specially authorised by the CommitteeRule 29. ; 18

Where two or more ratings are applicable to any one risk, the rate to be charged shall be that which will produce the highest net premiumRule 33. Except as provided for in the Rules for Blanket Insurances*, where two or more separate risks are insured in one amount the highest net rate applicable to any risk covered shall be charged for the wholeRule 35. 63. Because of the very wide variation in the physical characteristics of individual risks within a class, many of which are considered to have an effect on the degree of hazard involved and need to be taken into account in the determination of the premium, a system of common minimum charges can be operated effectively only if the tariffs are sufficiently comprehensive to provide rates which can allow for these characteristics and combinations of them. There are some features which are peculiar to the class of risk which a tariff covers, for example particular process being carried on or particular materials being used in an industry; features of this kind are specifically mentioned in individual tariffs and appropriate rates are provided to take account of their presence or absence. Other features, such as the quality of buildings and of fire extinguishing appliances, are considered likely to be common to all classes of risk and are therefore taken into account in the tariffs by reference to standards which are of general application (though the manner of taking these common standards into account may vary from class to class). 64. Therefore, in addition to the considerable amount of detail to be found in the tariffs themselves, there is also a substantial body of rules and regulations closely defining the various standards of building construction and design, sprinkler and other installations, alarm systems and the like, which the FOC recognises as affecting the degree of hazard and therefore the premium rate. The rules of this type are the following: Rules of the Fire Offices' Committee for Standards I, II, III, IV and V Construction, Rules for the Construction and Installation of Fireproof Doors, Lobbies and Shutters, Rules for Wired Glass and Electro-Copper Glazing, Rule 59 of the General Rules for the Regulation of Fire Insurance Business, which relates to extinguishing appliances other than sprinklers, Rules for Automatic Sprinkler Installations, Rules of the Fire Offices' Committee for Automatic Fire Alarm Installations, Rules of the Fire Offices' Committee for the Installation of External Drenchers. Some details of the contents and effect of these rules are given in appendix 5. 65. For a system of common minimum premium rates to be workable it is necessary to ensure not only that factors affecting the degree of hazard are defined and that common values are assigned to them (which is achieved by the tariffs themselves and by rules establishing standards), but also that the nature of the cover offered and the terms on which it is offered are standard or
* A blanket insurance is defined as one which covers: '(a) Buildings or (b) Contents (other than stock) of two or more separate risks in one amount or (c) Stock floating over any risks insured in accordance with (a) or (b) above whether or not other premises and/or property in the open are included in the Floater.'

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that any variations that are permitted are also standard and have agreed differential values attached to them. In addition, there is further uniformity in that the maximum rates of commission which tariff companies are permitted to pay to brokers and agents are laid down by the FOC (see appendix 3). 66. A standard form of policy is issued by the FOC, and its use for all fire insurances* is obligatory. The form may not be varied 'except in so far as may be necessary under a Tariff Regulation' or in accordance with Rules of the Fire Offices' Committee. In addition there are Rules governing the nature or extent of cover which may be offered and the terms on which it may be provided. Among these are the following: (a) Average In principle if a policy is subject to average the effect is that, if the property is insured for less than its full value, the insurer is liable to pay only that proportion of the amount of any loss or damage which the sum insured bears to the full value. If the property is under insured, an insurer, by applying average, restricts the extent of his liability in the event of a partial loss and will never be liable to pay the full value of any loss or damage. The FOC said that the application of average also tended to make the distribution of the cost of insurance amongst insureds more equitable. Average has always been widely applied in fire insurance; but in 1967 the FOC decided that all fire insurances (except insurances of private dwellings, churches and halls and Sunday schools associated with churches) should be made subject to average,. and on 2 March 1967 the General Rules for the Regulation of Fire Insurance Business were amended to give effect to this decision. Representatives of the independent companies and of Lloyd's underwriters were consulted by the FOC before the change was introduced and it was found that there was general agreement that the change should be made. In the event, independent insurers have made policies subject to average since 1967 in broadly the same way as is compulsory for tariff companies. Further information about average and the FOC's rules on the subject is set out in appendix 6. (b) Deductibles If an insured agrees to accept the first part of a loss up to an agreed limit, he may in principle expect to be allowed some discount on premium. The circumstances in which tariff companies may allow discounts for deductibles are controlled by the FOC by 'Regulations Governing Insurances with Deductibles' ; the discounts themselves are controlled by consideration of individual cases. The Regulations, which were made in 1964, and which apply to all insurances where the sum insured is not less than 2m, do not themselves specify the discounts which may be allowed, but they provide that the minimum deductible (ie the amount which the insured accepts) is 500, and the maximum 10,000; the Regulations also state that every case must be referred to the Special Standing Committeet for terms to be fixed and that every case must be resubmitted within three years. No discount for deductibles is normally allowed when the sum insured is less than 2m, though in a few cases exceptions have been made for subsidiaries of companies which themselves have a deductible, and in one case when it was expected that the sum insured would soon rise to
* Except insurances of private dwellings, offices, churches, chapels, schools and charitable ! institutions. . t See appendix 4. . .

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() Premiums paid by instalments and in respect of short periods '(i) The payment of premiums by instalments is allowed, but rules provide that payments must be at not less than monthly intervals and that a charge must be made 'for this service'. The amount of the charge is not specified. (ii) Rules also provide that premiums for short period insurances (ie periods of less than one year) shall be pro rata plus 5 per cent of the difference between the pro rata premium for the period and the annual premium.
Existing tariffs

67. The FOC has at the present time 94 tariffs in operation, but six of these refer to risks which are not covered by our terms of reference. Four of the six are not relevant because they relate only to the Republic of Ireland and the remaining two, the Special Perils Tariff and the Sprinkler Leakage Tariff, are not concerned with fire risks. The Household Tariff (Great Britain and Northern Ireland), which has now been abandoned, was only partly relevant since, although it related to domestic fire insurance, the premium rates laid down in the tariff applied to policies covering a variety of risks (eg theft) which do not come within the terms of our reference. The decision to abandon this tariff from 1 January 1971 was taken on 26 February 1970 and was announced by the FOC with the following comment:
While a tariff structure is the only possible way to provide a stable system for commercial and industrial fire insurance, a number of our members have felt for some time that private householders could be treated differently. They present a very great number of inherently similar small risks, and the change will give our members greater flexibility and greater opportunities in marketing domestic insurance.

68. . Of the 88 relevant or partly relevant tariffs three may be considered individually. These are the Combined Insurances Tariff, the Special Floating Policies Tariff and the Minimum Rates Tariff (Great Britain and Northern Ireland). 69. The Combined Insurances Tariff is a set of regulations governing the combining of different classes of insurance (eg fire, loss of profits, employers' liability etc) in a single policy. Although it is called a Tariff it does not lay down rates but does provide that the FOC Tariffs, Rules and Regulations must be complied with. 70. The Special Floating Policies Tariff is concerned with rates for goods, separately from the premises in which they are kept. A floating policy is one which provides cover under a single policy for specified property at two or more premises, the proportion at each of the premises being liable to fluctuation. The tariff lays down premium rates for various categories of goods when they are insured in this way. 71. The Minimum Rates Tariff provides for a minimum net rate of 7p per cent per annum for all insurances except those for which a minimum rate, which may be lower or higher than 7p per cent, is otherwise provided under any1 Tariff Rule or Regulation. For non-tariff rated risks tariff companies could, before 1964, charge any rate they considered appropriate provided it was not
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less than l/6d (7p); but following the introduction of the Minimum Rates Tariff in its present revised form in July 1964 the net rate then being charged by a tariff company on any non-tariff rated risk became the minimum rate for that risk under the Tariff. Where a risk was not so insured on that date, the net rate first charged after that date by a tariff company became the minimum rate under the Tariff. Where any such rate was increased because of an increase in risk, or reduced because of an improvement in risk, the amended rate was deemecl to be the minimum rate under the Tariff, subject to the net minimum rate of 7p being maintained. (The minimum fire rate for private dwellings and flats was not affected by the introduction of the revised Tariff and remained 72. The remaining 85 tariffs are almost all concerned with the establishment of premium rates for particular trades or industries. Many tariffs apply to the United Kingdom (or Great Britain, and Ireland), or to substantial parts of the United Kingdom (eg England, England and Wales, Scotland, or Midland Counties); in many cases a particular industry is covered by more than one tariff, each of which applies to a specific geographical area. A minority of the tariffs cover a particular town or part of a town or occasionally a group of towns and usually apply to a particular trade or industry to be found there (eg the Grimsby and Immingham Timber Yards Tariff), but exceptionally (eg the Belfast General Tariff and the Glasgow General Tariff) apply to a wide range of trades and industries. 73. A full list of the FOC's relevant tariffs is given in appendix 7.
Control of premium rates otherwise than by tariffs

74. In addition to the FQC tariffs, there are a number of sets of rules or regulations which, although not called tariffs, have the effect of tariffs in that they are concerned, inter alia, with rating. These relate to insurance of public property, of buildings in course of erection, of printers and allied trades, of theatres, music halls and cinemas, and of film production studios. Details are given in appendix 7. 75. Finally, any questions which arise in connection with the rating of, or conditions to be applied to^ the insurances of Imperial Chemical Industries Limited, Unilever Ltd and the national gas industry are dealt with by a special committee of the FOC (see appendix 4).
Content of the tariffs

76. The tariffs which establish premium rates are mostly complex documents, but the general form of them usually follows an approximately common pattern. Typically a tariff includes the following elements: (a) A preamble setting out the types of property and the geographical areas to which the tariff applies. (b) Special provisions. These may include interpretations of words or expresr sions used in the tariff, particular conditions which are to be included in a policy, and minimum rates which are to be charged even if allowances 22

under the tariff would yield a lower figure; they also often deal with the method of rating communicating buildings, which is regarded as an important aspect of the calculation of rates. (c) Normal rates. Under this heading there is a statement (expressed in pence per 100 of the sum insured) of the basic rate to be charged. Sometimes there are several normal rates each of which may vary according to the different types of building concerned, the use to which buildings are put and whether risks are sprinklered or non-sprinklered. (d) Additional rates. These provide for specified additions (expressed in money terms, as are the normal rates) to the normal rates, to be charged in respect of a variety of factors which are held to increase the degree of hazard. Additional rates are in most cases 2p to 5p but sometimes they are less and sometimes more, rising to 25p and in special cases more. The following appear to be typical: . (i) Buildings not of standard construction, ie not conforming to the lowest standard (Standard V) recognised by the FOC. (ii) Buildings of more than a specified number of storeys, (iii) Particular forms of lighting, (iv) Particular forms of heating, (v) Multiple tenancy of premises, (vi) Particular machinery being used or particular processes being carried out, (vii) Use of premises for purposes additional to those covered by the normal rates, . (viii) More than a specified number of employees. (e) Allowances. Under this head are set out the allowances, expressed as percentages (see paragraph 102), which may be given in respect of certain favourable features. Typically these are fire resisting construction, fire extinguishing appliances and automatic fire alarms. The allowances for fire resisting construction vary from tariff to tariff, but the following four examples, taken from different tariffs, of allowances in respect of Standards I, II, III and IV respectively appear to be typical:
,; Standard of construction Allowance (,%) as in four , different tariff's

I II III IV

() 40 30 25 20

.<&> 40 30 20 15 ,

(c) 35 30 25 20

W 30. 25 20 15

The extinguishing appliances for which the tariffs themselves specify allowances are in almost all cases automatic sprinklers only. These allowances, which are normally available only if there are such other appliances as will entitle the insured to an allowance of at least 10 per cent under .the Ordinary Scale (see B of appendix 5), normally provide for allowances, at six different rates according to the standard of installation (for which
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detailed technical specifications are given in the Sprinkler Rules). The Manchester Warehouses Tariff, for example, provides for allowances of 55, 50, 40, 35, 30 and 12\ per cent*,; the Lace Tariff provides for allowances of 45, 40, 30, 25 and \1\ per cent*. The overall range is from 60 per cent to 12| per centf. Sprinkler allowances are generally additional to those for 'Ordinary' appliances, but exceptionally they are stated to be 'inclusive of the allowance for other appliances'. A further allowance of 5 per cent is given where there is an approved system for the automatic transmission of alarm signals from the sprinkler installation to a fire brigade provided that an allowance has not already been granted for an approved automatic fire alarm installation. The allowances for extinguishing appliances other than sprinklers, being laid down in rules of general application, differ from those for sprinklers in that they do not vary from tariff to tariff. Allowances in respect of fire alarms vary according to the standard of alarm installed (see D of appendix 5); the rates are usually 12, 10 and 1\ per cent, but some tariffs provide for different rates. In the textile tariffs provision is made for allowances where certain machinery is protected by approved carbon dioxide or dry powder extinguishing systems, and in the Petroleum (General) Tariff provision is made for special consideration to be given to allowances for foam systems. (/) Warranties. Rule 51 of the General Rules for the Regulation of Fire Insurance Business describes in general terms the warranties which are normally required to be given by the insured, but these are supplemented or, in the case of a few tariffs, superseded if particular warranties are required by individual tariffs.
Changes in premium rates

77. The rates of premium laid down in the tariffs have in principle always been liable to alteration when necessary, and amendments to individual tariffs have in fact not infrequently taken place. However, in 1963, in the face of declining profitability of fire insurance the FOC began a process of reviewing and altering not only tariff rates as a whole but also the rates for non-tariff rated risks. , 78. In June 1963 a General Meeting of the FOC considered a report of the Sub-Committee re Home Fire Business, which had been" appointed in January 1963 to 'consider the present position in regard to insurances written in the Home Fire Department and to report'. The Sub-Committee's report stated that it had 'reviewed the collated returns of premiums and losses for sprinklered and non-sprinklered risks ... for 1952-1961 inclusive', and that it recommended 'as an immediate measure in the face of the continuously rising costs of claims and pending a more detailed examination of current claims experience' that a surcharge should be applied, with certain exceptions, to fire insurance premiums. 79. On 26 June 1963 a circular was issued by the FOC stating that it had been decided to impose 'an overall surcharge on premiums in respect, of all Tariff
* The amount of the allowances on installations conforming with the new Sprinkler Rules (29th edition) may be affected by those Rules, which came into force on 1 January 1969. t But see also paragraph 106.
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and non-Tariff rated Fire insurances and all Tariff and non-Tariff rated Special Perils insurances, except as provided below, the surcharge for risks in Great Britain and Northern Ireland to be 15 per cent, and for risks in the Republic of Ireland 25 per cent'. The exceptions were as follows: (i) Private dwellings (including blocks occupied solely as flats) whether rateable under the provisions of the Household Tariffs or otherwise. (ii) Churches, chapels, church halls and Sunday schools, (iii) Sprinklered risks. (iv) Certain risks in the Republic of Ireland (not covered by the Reference). (v) Consequential Loss insurances (not covered by the Reference). The surcharge became effective on 1 December 1963 or on the date of the first renewal after that. 80. In the case of some insurances subject to long term agreements (three years or five years) the application of the surcharge was necessarily delayed, but the FOC's circular stated that it had been decided that 'a prohibition be placed forthwith on any new Long Term Agreement or any extension, replacement or renewal of any current Long Term Agreement unless provision is made for the surcharge to become effective from the first annual renewal date on or after 1 December 1963'. 81. The purpose of the surcharge was to increase the total of premium income in respect of fire insurance, but the 'continuously rising costs of claims' was also to some extent to be countered by encouraging the use of sprinklers. 'Explanatory notes' which formed part of the circular include the following: 'Sprinklered risks have been excluded because of better claims experience; the increase in the difference between the premiums for sprinklered and nonsprinklered premises should be seen as a further encouragement of fire protection.' 82. Although the FOC has well established procedures for authorising departures from tariff rates and regulations in individual cases, it was not intended to accede to any applications for the surcharge to be relaxed. On this point the circular stated:
The ability of the Tariff market to carry the revised terms is thought to depend largely on the knowledge of the insuring public and agents that the surcharge is being applied without exceptions (apart from the excluded categories). No variation in surcharge will be allowed in individual cases. It will be appreciated that Offices are likely to be subject to increased pressures for reductions in rates in the period prior to the application of the surcharge and it is essential that such pressures should be resisted if the object of the surcharge is not to be defeated.

83. In July 1964 the General Meeting considered a further report by the SubCommittee re Home Fire Business following the Sub-Committee's 'examination of each class of Fire Business based on the classified returns for all Tariff and non-Tariff rated business for the years 1953/57 and 1958/62'. The report recommended that the 15 per cent surcharge should be replaced by a more flexible system of different 'percentage adjustments' to premiums for different classes of risks, with reduced 'percentage adjustments' for automatic sprinklers and
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for buildings of superior construction. The report said that the concessions proposed 'were consistent with the need (i) to encourage those features which militate against fire spread and (ii) to prevent the loss of the most desirable business'. 84. The report also said that the 'percentage adjustments should be related to the experience of individual classes' and that they should be 'calculated to yield a greater* overall addition to pre-surcharge premium income for the whole of the Home Fire portfolio of industrial and commercial business (ie excluding Private Dwellinghpuses and Consequential Loss)'. , 85. As a result of the sub-committee's report a circular was issued by the FOC on 30 July 1964 informing members that selective percentage adjustments, and other measures recommended by the sub-committee, were to be introduced. The principal provisions of the circular were that the 15 per cent surcharge would be replaced by such selective percentage adjustments (applicable to both tariff and non-tariff rated risks) as from 1 March 1965, and that non-tariff rates were frozen as from the date of the circular, the freezing of non-tariff rates being also dealt with in the revised Minimum Rates Tariff issued on the same day as the circular, 30 July 1964 (see paragraph 71). 86. The Schedule of Percentage Adjustments was issued on 6 August 1964. It applied to some 350 classes of risks and provided for adjustments to be made under four separate headings to, pre-surcharge ratesie in the case of tariff risks to whatever rate would be yielded by the tariff itself, and in the case of non-tariff rated risks to the current rate frozen in accordance with the Minimum JRates Tariff. The four headings are: . '\ (a) Non-sprinklered risks not conforming to Standard I, II or IHconstruction.f In a few classes the adjustment was nil, but in the great majority it was an addition, which varied from 15 per cent to 200 per cent] (b) Non-sprinklered risks conforming to Standard I, II or III construction.! In a rather larger number of classes (nearly one-third of the total) the adjustment was nil. In two cases the adjustment was minus and in the remainder the percentage to be ;a<Jded was generally significantly lower and never higher than that required under (a). ; (c) Sprinklered risks with superior sprinkler ,installations!. For most classes there was a minus adjustment, ie a percentage (usually 20 per cent) to be deducted; however, in a few classes a percentage was to be added or no adjustment applied. : (d) Other sprinklered risks. For nearly all classes the adjustment was nil. 87. In general, therefore, the percentage adjustments increased the irate of premium payable for non-sprinklered risks and either reduced it or did not increase it for sprinklered risks. However, in a few classes no concession was
*-ie greater than the 15 per cent surcharge which they replaced. t See paragraph 76 and appendix 5. j Defined by reference to the FOC's Rules for Automatic Sprinkler Installation.

allowed for sprinklered risks; and in three classes, which the sub-committee stated had been most unprofitable over recent years, new tariffs, which included allowances for sprinklered risks, were brought into operation in March 1965* (at the same time as the Schedule of Percentage Adjustments), and subsequent adjustments to rates have been made within the relevant tariffs themselves and not through the mechanism of Percentage Adjustments. 88. The Schedule of Percentage Adjustments is reviewed annually and amendments to the Schedule were introduced on 1 March 1967, 1968, 1969 and 1970, and on 1 January 1971 and 1972. As a result of these amendments, although the form of the Schedule has remained the same, a substantial number of the percentages have been changed. Most of the changes have been in the adjustments applicable to non-sprinklered risks; by 1969 over half the original upward adjustments in this category had been increased, some to ten or even as much as twelve times the original 1964 adjustment and many to two or three times. In a number of classes nil adjustments had been replaced either by upward or by downward adjustments, and in a few cases upward adjustments had been reduced. Many of the upward adjustments for unsprinklered risks were in 1969 100 per cent or more, and in four classesf they were 500 per centie pre-1963 premium rates had been increased six-fold. No substantial changes to the percentage adjustments were made in 1970, but in September 1970 the FOC announced a considerable number of increases to come into effect on 1 January 1971. These involved no increases for sprinklered risks, but for unsprinklered risks the changes in adjustments had the effect of increasing the then existing rates by more than 100 per cent in three classes, by between 50 and 100 per cent in 49 classes, and by less than 50 per cent in 38 classes. For 250 classes of unsprinklered risks the rates were not increased. For the first time upward percentage adjustments of 600 per cent and 750 per cent (to the rates existing in 1963 before the first surcharge) were introduced for a few classes of unsprinklered risks. The adjustments introduced in 1972 were few in number and did not appear to have any significant effect on the rating structure as a whole. 89. For sprinklered risks there have been very few amendments since 1964, so that on the whole the rating differential between sprinklered and nonsprinklered risks, already substantial in 1964, has widened still further. Moreover, negative adjustments (ie those in respect of the best sprinklered risks) may be applied even though they reduce the premium below the minimum otherwise allowed by the Minimum Rates Tariff or (with one exception) allowed by any particular tariff which includes a minimum rate. Note 2 to the Schedule of Percentage Adjustments states 'Minus adjustments to premiums may be allowed notwithstanding the provisions of General Rule No 6, the Minimum Rates Tariff (Great Britain and Northern Ireland) or any other Tariff except the Hosiery Tariff 4

* Motor Vehicle Manufacturers Tariff, Aircraft Engine Manufacturers Tariff and Glass Manufacturers Tariff. t Plastics manufacture, foamed rubber manufacture, drapers' and haberdashers' shops employing more than 100 assistants, and certain miscellaneous manufacturers. J In the Hosiery Tariff the minimum rate for unsprinklered risks is 7|p and for sprinklered risks 5p, ie lower in the case of sprinklered risks than the 7*p allowed by the Minimum Rates Tariff.

90. In the report which led to the introduction of percentage adjustments, the sub-committee recognised that certain insurances had already had increased premium rates applied to them on account of adverse experience. In accordance with the recommendation of the sub-committee the FOC's circular stated that when such increases had been made since 1 March 1963, if they were below the percentage adjustment for the class/ they were to be increased to that percentage and, if they were above the percentage adjustment for the class, the increased rates were to be maintained. 91. The sub-committee also considered 'special discounts' (see paragraph 109). Its report said :
Many large insurances have the benefit of special discounts, but the Sub-Committee would prefer to see the end of these in so far as they have been granted for size of sum insured unredeemed by an attractive spread of risk. There may be cases where a discount is warranted because of this latter feature, but the reduction of premium purely on grounds of sum insured has been one of the factors leading to the present difficulties.

Discounts of this kind were dealt with in the FOC's circular as follows;
All Special Discounts are withdrawn in relation to risks rateable under the new Tariffs* . . . For other risks it is recommended that whenever the opportunity arises, -such as when rates are increased because of unfavourable loss experience, special discounts should be withdrawn. .

92. The sub-committee considered that the introduction of percentage adjustments, unlike that of the earlier 15 per cent surcharge, would give rise to the need for some machinery for considering applications for departures from the strict enforcement of the adjustments. The sub-committee report said:
: It is realised, however, that the proposed general form of preferential treatment for risks of superior construction and most sprinklered risks will not necessarily operate for the benefit of individual risks which contain favourable features indicating in a practical way that an Insured is fire-prevention conscious, but which it has not been possible to recognise fully in the rating structure, and whose experience, notwithstanding the general experience of the class, has remained consistently profitable. In order to assist Offices in appropriate cases to avoid the loss of such business where the new proposals would involve an increase in terms, the Sub-Committee consider that some provision for concessions will need to be envisaged for such cases, but that it should be such as to ensure that any special treatment should not have the effect of seriously prejudicing the need to obtain the desired increase in premium income overall and that it could only be in exceptional circumstances that any departure might be justified. . ,

The sub-committee then recommended that a Standing Committee should be set up to deal with applications, and went on to recommend guidelines within which the Standing Committee should work. 93. The FOC's circular dealt with the matter of departures as follows:
The revisions now promulgated represent a major step in placing Home Fire Business .on a more satisfactory footing, though not necessarily the final step. It is recognised that there may be disturbance of existing connections, and it is emphasised that the object of restoring the account to a profitable basis will not be achieved if special terms are freely sought other than those sought solely on grounds of hardship. Only in quite exceptional circumstances will the Committee be prepared to consider concessions.

The procedure for dealing with applications for departures from upward percentage adjustments, and the guidelines recommended by the sub-committee, were,-as recorded in the minutes of the General Meeting of 20 July 1964, adopted by,the Qeneral Meeting (see paragraphs 113 and.l 14).
* See footnote to paragraph 87.

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94. FinalJy, the sub-committee's report foreshadowed a further stage in the development of the tariff system. The report stated that the replacement of the 15 per cent surcharge by the percentage adjustments and other measures recommended in the report were 'seen as the second stage in the general reconsideration of Home Fire Business, with a closer and more detailed review of the present rating structure both Tariff and non-Tariff to be undertaken as a third stage'. Since 1965 the FOC has been investigating the possibility of gradually introducing 'a new and generally applicable rating structure embracing tariff and non-tariff rates and superseding the Schedule of Percentage Adjustments already referred to'. Work on this project is expected to take several years, and it is contemplated that there should ultimately be a new General Tariff assigning values to a number of variables (see paragraph 124) on the basis of statistical information which will by then be available. 95. At the time of the introduction of the 15 per cent surcharge in 1963 representatives of the independent companies and of Lloyd's underwriters were informed that the surcharge was being introduced and also that it was intended to replace it as soon as possible by a second stage consisting of selective premium increases. When the percentage adjustments were introduced in 1964 the General Meeting resolved:
that the Home Fire Business Liaison Committee be requested to arrange for the Non-Tariff Companies, Lloyd's, The Corporation of Insurance Brokers and the Association of Insurance Brokers to be informed in general terms of the broad principles upon which the Committee propose to proceed.

In the event both independent companies and Lloyd's underwriters have generally applied both these forms of premium increases (see paragraphs 145 to 149). Computation of premium rates 96. A report by a surveyor is normally the basic source of information available to an underwriter about a particular risk to be insured. A report for a tariff company would give a general description of the buildings and contents to be insured, their situation, the trade for which they are used together with the nature of the work carried on and materials used, and some indication of the standing and attitude to good housekeeping and fire prevention of the prospective insured. Detailed information would then be given about the construction, design and occupation of each individual building in such a way as to make clear the extent of compliance with the standards laid down in the various sets of FOC rules which are of general application irrespective of particular tariffs, and also to draw attention to features which the relevant individual tariff requires to be taken into account (principally those features which attract additional rates). 97. In addition to information about all the factors which directly affect rating, a surveyor's report may also suggest that certain features (for example marginal non-compliance with a particular standard) may merit an application to the FOC for permission to depart from the strict application of tariff rates, particularly if there is known to be a precedent for allowing such a concession. The report may also make recommendations for alterations which, if carried out by the prospective insured, would improve the risk and affect the rating.
B

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98. Finally the report will state which tariff, if any, is applicable and will also state the premium rate payable under that tariff in respect of each building in accordance with the information already given. 99. When non-tariff rated risks are surveyed the report takes the same general form as that for a tariff rated risk. Attention will be drawn to all those features of the risk which are the subject of standards under FOC rules of general application, and in addition the report may indicate the features, particularly those which would attract additional rates, which would have to be taken into account under a tariff for a trade similar to the one being surveyed. 100. A report on a non-tariff rated risk cannot state any correct tariff rate for the risk; but it may state what the rate would be if a tariff covering similar risks were applied to the physical characteristics as disclosed by the report, and also suggest a value to be placed on any features actually present but not provided for in, for example, the additional rates listed in the similar tariff. Thus surveyors' reports on non-tariff rated risks are not only compiled on the basis of FOC rules of general application regarding standards but may also take into account the requirements and rates included in particular tariffs. 101. A surveyor's report is the basis, on which an underwriter can decide both whether the risk is acceptable, and if so what proportion of it the company wishes to retain and at what premium rate. In the case of tariff rated risks the underwriter must use his judgment and experience to decide whether the tariff rate should be charged or, particularly if the report contains some relevant recommendation, whether either some higher rate should be charged or an application should be made to the FOC for some concession. In the case of non-tariff rated risks the premium rate ultimately fixed depends similarly on judgment and experience, with, however, the restriction under the Minimum Rates Tariff that the rate must not be less than 'the net rate first charged on or after the 30 July 1964 by a tariff office' (appropriately adjusted under the Schedule of Percentage Adjustments). There is little scope for any negotiation with insured on premium rates; but the insured, or more probably his broker, may be able to: .negotiate lower rates in return for specific risk improvement, and on occasion a review of the characteristics of the risk or of the material circumstances (eg the proportion of different activities carried on at the property) may lead to a reclassification of the risk into a different class. 102. In the case of a tariff rated risk, it should be clear from the surveyor's report under which particular tariff the risk should be rated. The premium rate can then be calculated on the basis of the information in the report about the presence or absence of factors which merit additional rates (eg particular processes being carried on, number of storeys, etc) or which merit allowances (eg standard of construction or fire extinguishing appliances in accordance with the relevant rules). To the normal rate shown in the tariff must be added any additional rates which the tariff may require. From the resulting gross rate any.allowances which are applicable are deducted in the following order: (a) allowances for a standard of construction better than Standard V, (b) allowances for sprinklers and fire extinguishing appliances, (c) allowances for fire alarms.

The percentages are calculated sequentially (only the first being calculated as a percentage of the gross rate), except that, although there are separate scales for sprinklers and extinguishing appliances other than sprinklers, the percentages for these two factors are added together and that for extinguishing appliances other than sprinklers is not calculated on the rate as already reduced in respect of sprinklers. 103. The appropriate percentage adjustment is then applied to the net premium rate ascertained as above. If the risk is not sprinklered this may mean an addition of up to 750 per cent of the net premium rate arrived at as in paragraph 102, while for sprinklered risks the percentage adjustment is usually nil or minus 20 per cent. 104. If the final rate before percentage adjustment is less than the 7p per cent allowed under the Minimum Rates Tariff then the rate to which the percentage adjustment will be applied will be 7p; a negative percentage adjustment may still be applied even if it reduces the rate charged below 7p. 105. The most substantial discounts available under the tariffs are those for high standards of building construction and those for sprinklers. Where buildings are of a low standard of construction the incentive to install sprinklers is correspondingly higher than it is with fire resistant buildings, since the various allowances are applied to a diminishing total (see paragraph 102). 106. The Schedule of Percentage Adjustments differentiates not only between classes of risk but generally also within classes between sprinklered and nonsprinklered risks and between risks involving different standards of construction. For sprinklered risks the percentage adjustment, which is usually either nil or minus 20 per cent according to the standard of sprinkler installation, takes no account of the standard of construction; but for non-sprinklered risks the percentage adjustment, which is almost always positive, varies with the standard of construction. Thus the total effect on the premium of installing sprinklers may be very substantial. The final net premium may commonly be no more than one-fifth or one-sixth of what it would be if the same risk were urisprinklered; in some cases it may be even less. 107. The percentage adjustments, with their sharp distinction between sprinklered and unsprinklered risks, are applied in the same way to non-tariff rated risks and, since the rates to which the adjustments are applied have normally already taken into account the presence or absence of sprinklers (see paragraphs 99 and 100), the rating differentials between sprinklered risks and unsprinklered risks are of the same order for non-tariff rated risks as for tariff risks.
Departures from tariff rates

108. Although the premium rates derived from the tariffs, in accordance with all the relevant rules and regulations, and after application of the relevant percentage adjustments, are minimum rates binding on all tariff offices, it is open to tariff offices to apply for authority to charge less than the tariff rates
31

in particular cases. The power to grant concessions rests, in principle, with the FOC in general meeting, though in practice there are well established procedures under which many applications are dealt with by committees. 109. Before 1964 many applications were granted allowing special discounts in respect of 'insurances of exceptional importance'* merely on account of the large size of the insurances concerned. The FOC's records show that in the five years 1959 to 1963 the number of cases in which special rates were fixed for 'insurances of exceptional importance' varied between about 600 and about 700 annually. However, in 1964 it was decided that it was preferable that these discounts should be discontinued on the ground that, although there might be cases where a discount was warranted solely by the size of the sum insured, 'the reduction of premium purely on the grounds of sum insured has been one of the factors leading to present difficulties' (see paragraph 91). Nevertheless, it was considered impracticable to cancel all existing special discounts immediately, and it was decided, with certain exceptions, to eliminate them as opportunity arose and not to grant any new or increase any existing special discounts; it was also decided that extension of a group discount to a newly acquired subsidiary should require the authority of the FOC in each case, and that favourable consideration would be given only when the business of the new subsidiary was similar to that of the existing group and 'the experience of both the group and the subsidiary has been satisfactory and the level of rating is appropriate; associate companies should not be entitled to the discount authorised for a group of companies and any special discounts authorised for such group must be withdrawn from the associated companies unless specially approved by the FOC'. The exceptions referred to above were 'cases of a certain size where an attractive spread of risk among a number of individual small units was present, for example chains of small shops, motor garages and public houses, and where the experience had been satisfactory'. In these cases a special discount could be allowed. 110. Until 1964 applications for special discounts accounted for only a relatively small part of the total number of applications for departures from tariff rates. After 1964 the General Meeting continued to deal with substantial numbers of applications for departures from tariff rates, but although many were dealt with under the category of 'insurances of exceptional importance'! discounts were no longer being granted solely on account of the size of the sum insured. The category was discontinued in June 1966. The total number of applications of all kinds in respect of individual insurances being granted by .the General Meeting after 1964 was of the order of 700 annually until 1966, .though only a few were concerned with special discounts. Many were applications for special rates to be fixed for particular premises or parts of premises. Other applications, however, were granted for the waiving of technical requirements either of tariffs or of rules, for example no additional rate in respect of night storage electric heaters (even though this was specifically required by the tariff in question), a particular building to be regarded as of fire resisting construction (even though it did not strictly conform under the rules); particular fireproof doors to be accepted (although they did not fully conform to.the Rules for Fireproof Doors), a particular building to be regarded as a sprinklered risk, a particular building to be regarded as of Standard III Construction.
* Sums insured otaot less than 250,000. ' t 1964, 470; 1965, 560; 1966 (* year), 330.
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<

,: i

111. In June 1966 the General Meeting considered and accepted a report by the Joint Sub-Committee re Home Fire Business, which recommended certain changes in the procedure for dealing with applications for special terms involving departures from tariffs and rules. As a result, a new sub-committee, the General Practice Sub-Committee, now known as the General .Practice Committee, was set up with powers to approve applications previously dealt with under other FOC procedures which did not involve 'any material departure from the Committee's well established principles and practices'. From that date all such 'precedented' applications have been submitted under the heading of the relevant Tariff, Rules and Regulations, and have included applications which would previously have been submitted to the General Meeting under the heading of 'Insurances of Exceptional Importance'. 112. As a result in part of the setting up of the General Practice Sub-Committee to deal with these 'precedented concessions', the number of items of business relating to individual insurances dealt with by the General Meeting dropped to about 600 in 1967 and to about 460 in 1968. The General Practice SubCommittee is stated to have dealt with 'thousands' of cases since it came into existence in mid-1966; in the relatively few cases which it has felt unable to approve, the applications are brought before the General Meeting. 113. With the introduction of percentage adjustments in 1965 it became necessary to introduce a procedure for dealing with applications by tariff offices for authority not to apply the whole or part of upward adjustments in particular cases. These applications are dealt with by the Special Standing Committee in accordance with guidelines recommended to the General Meeting and adopted by it in 1964. As already noted in paragraph 93, the policy was that, in general, concessions should be considered 'only in quite exceptional circumstances', and in detail the recommendations adopted were as follows:
The following are the features which should be regarded as material in judging whether the circumstances merit a concession in a particular case: (a) Specially favourable loss experience over a long period, eg 20 years. (b) No buildings having large undivided areas. (c) No undue concentration of value at any one premises. (d) No unfavourable features of construction, whether in the roof, walls, floors or internal linings. (e) Superior fire prevention arrangements, eg an efficient full-time Works Fire Brigade. (f) The electrical installation to be maintained in first-class conditionpreferably a certificate to be obtained annually from a qualified Electrical Engineer in confirmation. (g) Smoking restricted to permitted zones only. (h) Allied to the above mentioned features, a responsible attitude on the part of managements towards such factors as general maintenance and cleanliness, safe storage and fire prevention, together with any other pertinent favourable features advanced by the Submitting Office.

The Standing Committee was not to work to a set scale 'as this would tend to become a pattern for all cases', but the following 'broad principles' were to be adopted:
(a) No concession to be granted unless most of the features listed above are present. (b) (i) No reduction to be permitted which has the effect of reducing the premium below the pre-surcharge premium, (ii) If the percentage adjustment increase for the class exceeds 15% some increase in the pre-surcharge premium to be applied, (iii) No reduction in premium to exceed normally a prescribed percentage of the revised premium, ie that produced by applying the percentage adjustment for the class to the pre-surcharge premium.

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(c) Unless there are other exceptional circumstances premium concessions to be restricted to cases where the sum insured is in excess of 2 million. (d) Applications for concessions to be kept to a minimum.

114. Examination of the minutes of the Home Fire Business Standing Committee for 1967 and 1968 shows that the Committee (or its Rota Sub-Committee) dealt with 74 applications relating to proposed concessions in respect of upward percentage adjustments in 1967 and with 56 in 1968, not all of which were granted. The concessions granted have sometimes taken the form of a reduction in the amount of the percentage adjustment and sometimes that of a percentage reduction of the final premium after application of the percentage adjustment. 115. The Home Fire Business Standing Committee (now the Special Standing Committee), also deals with applications for discounts in cases where the insured agrees to bear the first part of a loss, that is discounts for insurances with deductibles. The Committee (or its Rota Sub-Committee) dealt with 49 applications concerning deductibles in 1967 and with 64 in 1968 and in most cases it approved rates of discount for deductibles of particular amounts, within the terms of the Regulations Governing Insurances with Deductibles already referred to in paragraph 66.
Statistical and technical basis for premium rates

116. The various factors, some or all of which are taken into account in arriving at premium rates under the tariffs (ie normal rates, additional rates, allowances for superior construction, sprinklers and other extinguishing apparatus, fire alarms etc), all involve specified amounts of money expressed either as pence per 100 of the total sum insured or as percentages of the relevant rate (see paragraph 102). These amounts are determined by the exercise of the collective judgment of the members of the FOC. They are usually laid down in the tariffs themselves and may vary from tariff to tariff or, less frequently (as in the case of extinguishing appliances other than sprinklers), are derived from a scale laid down in rules of general application and are therefore standard for all tariffs irrespective of the trade, industry or occupancy to which a tariff relates. 117. The values placed by the FOC on the various components which make up a premium rate have been derived from technical data and from collective judgment,'and have not been based on statistical data. Until very recently (see paragraphs 123 and 124) the FOC had no statistical data relating to any elements except the presence or absence of sprinklers. 118. Nor, until 1966, did the FOC have any comprehensive statistics for checking, and therefore correcting as might seem necessary, the overall effect (whether over all classes or class by class) of applying tariffs. Before 1964 some small tariff companies (whose share of the market was insignificant) had been unable to make fully classified returns, though the larger tariff companies had made available to the FOC, on an ad hoc basis as and when required, statistics from their own records, which were generally kept in accordance with the FOC's recommended classification list. 34

119. Since 1963 figures of premiums and losses for all classes have been taken out annually arid in 1965 the decision was taken to make returns of claims and premiums mandatory on all members of the FOC. Full class by class returns became available for the years 1966 onwards, though corresponding returns, to the extent that they could be obtained, had become available in 1963 in respect of the two five-year periods 1953 to 1957 and 1958 to 1962, in 1965 in respect of 1963 and 1964, and in 1966 in respect of 1965. 120. The FOC now obtains annually the following information from all tariff companies: (i) premiums and losses by classes (covering non-tariff rated risks as well as tariff rated risks), and separately for sprinklered and non-sprinklered risks within each class, (ii) details of fires where the loss exceeded 10,000, (iii) information from the member or members making the largest loss return(s) in individual classes. In addition, particular requests to FOC members may be made for information to show, for example, whether unfavourable loss experience for a class relates to any particular section of the trade or occupancy covered by that class. 121. The returns made show the past results, in terms of premiums and claims, of applying the tariffs, class by class and for sprinklered and non-sprinklered risks. The premium figures, when collated, consist of the sum of premiums charged by the members for individual risks in each class (or sprinklered and non-sprinklered sub-class), the premium for each risk representing a different combination of tariff components applied to the sum insured. The statistics therefore provide information on the overall effects of different tariffs; but they cannot (except on occasion by very imprecise inference) throw light on the validity or otherwise of the components. 122. The normal rates, additional rates and allowances have been, and still are, therefore, determined on a non-statistical basis. Thus the precise values in any particular tariff of additional rates and of allowances for superior construction, extinguishing appliances etc, are not statistically determined. In particular the inclusion of additional rates appropriate to individual tariffs, as well as the money values placed on them, are the result of pooled judgment rather than of statistical analysis, while the money values placed on allowances in individual tariffs (eg for the various standards of building construction) are based on technical research and judgment rather than on statistics. The statistical information now obtained by the FOC is used mainly in connection with decisions whether to raise (less often to lower) the premium rates for all risks in a class by a flat proportion; that is to say, it is used for determining changes in the percentage adjustments (see paragraph 168). 123. In 1967 the FOC commissioned consultants to advise on the collection of additional information to provide some statistical basis for some of the tariff components. With the advice and assistance of those consultants the FOC was at the time of our inquiry in the process of introducing a system for obtaining much more detailed statistical information, progressively from 1970 onwards,
35

analysis of which would, the FOC believed, provide a statistical basis not hitherto available for certain 'rateable factors' which would be generally applicable to risks of all classes. These 'rateable factors' are the following: Construction Standard I Standard II Standard III Standard IV Standard V . Other constructions
3

Height Single storey Two to eight storeys Over eight storeys Undivided floor area Up to 25,000 sq ft 25 55,000 sq ft 55105,000 sq ft Over 105,000 sq ft Combustible ceilings and linings No combustible ceilings or linings Combustible ceilings or linings Protection SprinklersStandard A and Class I Standard B and Class II Ordinary and Class III Ordinary appliances to scale and no sprinklers No ordinary appliances to scale Approved automatic fire alarm No approved automatic fire alarm. . -:

124. The new system is designed to provide statistics relating to all those rateable factors (and their subdivisions) set out in the previous paragraph; and those statistics should, the FOC hopes, help to place values on all those factors in the general tariff, applicable to all classes of risk, which it is proposed eventually to introduce. 125. The FOC has also recently begun to collect figures of sums insured by classes, so that it will be possible to calculate not only loss ratios (ie losses in relation to premium income) but also burning costs (ie losses in relation to sums insured) for each class. The FOC said that unlike loss ratios, burning costs, relating as they do to losses and sums insured, are unaffected by changes in expenses and profits (or losses). Burning cost statistics will therefore, it is claimed, .yield additional useful information, but they will not, by themselves, provide a basis for establishment by the FOC of actual rates. Burning cost data will also be used in the collection of the statistics relating to 'rateable factors' (paragraphs 123 and 124). 36

126. Finally, it has been recognised that, because of the distorting effect of comparatively infrequent large losses, the statistical method hitherto being used does not, for most of the large number of classes of risks, yield statistically valid information on an annual basis. Improved validity of the statistics is intended to be achieved by a refinement of method involving separate treatment of large, medium and small losses. This refinement is described in paragraph 196.
Reinsurance

127. Members and Associates of the FOC are not restricted as to the ceding or accepting of reinsurance under treaties but they are restricted in the cession and acceptance of facultative reinsurance (see paragraph 42). Upon joining the FOC, Members and Associates give the following undertaking (by which existing Members and Associates are also bound):
[Not to] transact Reinsurance business to which the Committee's Rules for the Regulation of Guarantee Transactions [synonymous with facultative insurance] apply, with a Company established or represented in Great Britain or Ireland and accepting risks in Great Britain or Ireland either direct or by Reinsurance without being a Member or Associate of the Committee. NB. The term 'Company' shall include a person or persons and any Office, Society, Corporation, Association or Firm.

128. The effect of the foregoing is that independent insurers are prevented from ceding facultative reinsurance to any company which is a Member or an Associate of the FOC. Independent insurers are, in fact, prevented from ceding facultative reinsurance to any company established or represented in Great Britain or Ireland to which tariff companies cede facultative reinsurance, since all such companies must be Members or Associates of the FOC. Companies established or represented in Great Britain or Ireland and carrying on reinsurance business there must therefore, as far as facultative reinsurance is concerned, opt to do business either with tariff insurers or with independent insurers. 129. There are, however, no similar restrictions placed on Members or Associates of the FOC regarding the ceding of facultative reinsurance to, or accepting it from, foreign companies not established or represented in Great Britain or Ireland. 130. The different treatment by the FOC of treaty and facultative reinsurance arises from the fact that, while treaty reinsurance normally relates to a predetermined part of the ceding insurer's whole fire business or of a certain class of it and the accepting reinsurer is not therefore generally concerned with particular transactions entered into by the ceding insurer or with the terms on which they were entered into, this is not so with facultative reinsurance. The FOC told us:
There is commercially very little difference between underwriting a risk or a proportion of a risk directly and facultatively reinsuring that risk or that proportion of the risk. Insurers tend to think of the business which they obtain from another insurer by acceptance from him of facultative reinsurance in just the same way as they think of the direct business which they obtain through agents.

131. Given that facultative reinsurance is seen in this light, it follows that the tariff system requires that there should be restrictions on the transacting
37

of facultative reinsurance in order to prevent infringement of some: of the basic rules of the tariff system. If FOC members were free to accept facultative reinsurance from independent insurers they might, whether knowingly or not, in effect be accepting business at rates below tariff rates or business involving commission above the permitted maximum. If FOC members were free to cede facultative reinsurance without restriction they might be enabling independent insurers in effect to obtain more than 35 per cent of a risk in contravention of the 65/35 Rule (see paragraph 135 and appendix 8). Co-insurance 132. Certain aspects of co-insurance have, since 1930, been the subject of an agreement between a number of tariff offices, formerly called the Competition Agreement but since 28 May 1969, when the agreement was last revised, called the Co-insurance Agreement. All the fifteen subscribers to the agreement are member companies of the FOC and, although there are FOC members (particularly foreign-owned companies) which are neither subscribers nor subsidiaries or associates of subscribers, their share of reference business is small, and about 98 per cent (by premium income) of reference business written in the tariff market is accounted for by subscribers. The Co-insurance Agreement is not an agreement made within the FOC, and there is no rule of the FOC or undertaking given by FOC members requiring adherence to the agreement.. Nevertheless, when consideration was being given in 1968 to the introduction of a.ponstitution for the FOC the agreement was revised to bring it into line with the actual arrangements which were then and for some years past had been in operation and with a view to the agreement possibly being incorporated in the constitution; however, the present reference was announced and it was decided that the subscribers should adopt the revised agreement and that the FOC should defer a decision on whether to incorporate it in the constitution. 133. The agreement is not administered by the FOC but by a committee of subscribers to the agreement known as the Co-insurance Committee (formerly the Competition Committee). 134. The Co-insurance Agreement relates to the sharing of co-insurance both among tariff companies themselves and between tariff companies and independent insurers. The clauses relating to the sharing of business among tariff companies provide mainly that the proportion of a co-insured risk held by subscribers to the agreement shall remain as far as possible undisturbed in the event of changes such as the lead being transferred from one tariff company to another or the total sum insured by tariff companies being reduced. 135. The clause relating to the sharing of business between subscribers to the agreement and independent insurers provides principally that subscribers will not participate in any co-insurance if less than 65 per cent of it is placed with tariff companies. It is this provision which is commonly known as the 65/35 Rule. 136. Details of the provisions of the Co-insurance Agreement together with :some particulars of the attitude of the Co-insurance Committee to applications for the 65/35 Rule to be waived are set-but in appendix 8. .
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137. In addition to the Co-insurance Agreement there is one arrangement of the FOC which may have a bearing on the sharing of co-insurance between tariff and independent insurers. The FOC's Cotton Mills Tariff (England & Ireland) provides for 'special concessions' (ie percentage allowances off the premium) according to the proportion of the insurance (from 60 per cent upwards) that is placed with tariff insurers. This tariff is the only one to contain a provision of this kind, and there are no FOC rules of general application permitting such discounts. 138. With regard to the cost to insurers of arranging co-insurance, which must fall heavily on the leading insurer and only relatively lightly on following insurers, the tariff companies have entered into an agreement designed to spread the costs more evenly. In June 1970 the FOC adopted a scheme, to become operative on 1 January 1971, under which tariff co-insurers reimburse the leading tariff office with 2\ per cent of their respective shares of the total annual premium (before deduction of commission) from insurances concerned.

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