The cargo insurance premium on a single shipment is typically calculated as the insured value times the policy rate. And what is insured value? The simplest method to calculate insured value is to add the commercial invoice value of the goods to the cost of freight and add ten percent to cover additional expense.
It is important to review the terms of your insurance policy, specifically the valuation clause, to be certain of how the policy expects the goods to be valued.
It is important that the correct insured value is selected when insuring your cargo. Selecting an amount that is less than the value of the goods, or underinsuring the shipment, can have dire financial consequences. You may be familiar with the term Coinsurance from medical coverage where it is quite common.
Coinsurance is the amount in claim that the cargo owner has chosen not to insure – this amount is essentially covered by the cargo owner after the deductible has been paid and before the insurance company pays.
Cargo insurance calculations depend on several factors, including the value of the goods being transported, the nature of the shipment, the journey, and the risks involved. Insurers use specific formulas and assessment criteria to provide coverage that protects against loss or damage to goods while in transit, whether by sea, air, or land.
Insured Value Calculation
The foundation of cargo insurance pricing is the insured value. Typically, it consists of the following components:
- Invoice Value of Goods: The primary factor is the declared invoice value of the shipment, which represents the cost or sale price of the goods.
- Freight Costs: Shipping and handling costs may be included to ensure full coverage. This aspect protects the financial interests of the parties involved in the transportation.
- A Fixed Percentage: Insurers commonly add a fixed percentage (usually 10%) to the combined value of goods and freight to account for potential extra expenses, such as customs duties or unforeseen financial losses. This percentage may vary based on specific terms and requirements.
The general formula for calculating the insured value is: Insured Value = (Invoice Value + Freight Costs) × 1.10
Cargo insurance Coverage Type
Cargo insurance policies are tailored to meet different needs, impacting the overall premium:
- All-Risk Coverage: This comprehensive coverage accounts for nearly every potential risk or peril, excluding named exclusions. It is typically more expensive but provides maximum protection.
- Named Perils Coverage: This covers only specific, listed risks, such as fire, theft, or natural disasters. It is less expensive but offers limited protection.
The chosen coverage affects the premium rate.
Risk Assessment
The insurance provider evaluates the risk associated with the shipment, influenced by:
- Type of Goods: Fragile, high-value, or perishable items may attract higher premiums. Certain goods, like electronics or luxury items, require more protection due to higher risk.
- Mode of Transport: Transporting goods via sea, air, or road carries different risk levels. Marine shipping can be riskier, with exposure to weather events and piracy, leading to higher premiums. Air cargo, being faster and safer, often attracts lower rates.
- Route and Destination: The origin and destination also impact pricing. Shipping to politically unstable regions or areas with higher crime rates may increase premiums. Natural disaster-prone regions also affect the calculation.
Policy Terms and Deductibles
- Deductibles: The amount the policyholder agrees to pay before insurance coverage kicks in influences the premium. Higher deductibles usually mean lower premiums and vice versa.
- Policy Terms: The length and scope of the policy may alter costs. Single-shipment policies may have different rates compared to annual or blanket policies that cover multiple shipments.
Premium Calculation
Once the insured value and risk factors are assessed, insurers calculate the premium using a rate per $100 of insured value. The rate depends on various factors, including past loss records, shipment volume, and the insurer’s underwriting guidelines.
Example Calculation:
If the insured value of a shipment is $110,000 and the rate per $100 is 0.5, the premium would be:
Premium = (Insured Value / 100) × Rate = ($110,000 / 100) × 0.5 = $550
