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How is cargo insurance calculated?

How is cargo insurance calculated?

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 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.

Coinsurance is typically expressed as a percentage. In a policy with twenty percent coinsurance, the  insurance company will pay eighty percent of the loss, and the insured will pay the remaining twenty percent. In a cargo policy, coinsurance comes into play when a shipment is underinsured.

Cargo insurance, which provides coverage for loss or damage to goods during transit by land, sea, or air, is generally calculated based on several key factors.

Insurers use these variables to determine the appropriate premium and coverage amount to protect against potential risks.

Key Factors in Cargo Insurance Calculation

  1. Value of the Cargo
    The primary component in calculating cargo insurance is the declared value of the goods being shipped. This value is typically determined based on the commercial invoice, which lists the cost or price of the cargo. In some cases, the cost might include additional expenses such as packing or transport fees. Most insurers require the declared value to represent the full value of the goods to ensure adequate coverage.
  2. Type of Cargo
    Different types of goods carry varying levels of risk. High-value items, perishable goods, or fragile items may lead to higher premiums. For instance, electronics or luxury goods are considered more prone to theft, while foodstuffs may spoil if delays or temperature control issues occur. Insurance providers assess the nature of the goods to evaluate the potential risk and adjust the premium accordingly.
  3. Mode of Transport
    The method of transportation also affects the cost of cargo insurance. Sea freight is generally riskier than air freight due to the possibility of rough weather and the length of transit. Goods transported by road can face risks like accidents or theft. Additionally, multimodal transport (using two or more transportation methods) may influence the premium if it exposes the cargo to multiple types of risks.
  4. Destination and Route
    The origin and destination of the shipment, along with the route it takes, also influence the insurance cost. Routes passing through high-risk regions—such as those known for piracy, extreme weather, or political instability—will have higher premiums. Insurers often use historical data and risk assessments to evaluate the safety and risk of various shipping routes.
  5. Coverage Type
    Cargo insurance offers different levels of coverage. The most comprehensive is “all-risk” coverage, which covers almost every possible risk except specifically excluded events. More limited policies, such as “named perils” coverage, only cover specific risks like fire, theft, or collision. All-risk coverage is generally more expensive than named perils coverage. Policyholders must weigh the cost of coverage against the risks they are willing to take.
  6. Duration of the Shipment
    The length of time the goods will be in transit also impacts the insurance cost. Longer durations increase the risk of damage or loss, leading to higher premiums. For sea freight, extended exposure to elements like humidity or potential port delays may also increase the likelihood of claims.
  7. Deductibles
    A deductible is the amount the policyholder agrees to pay out of pocket before the insurance coverage kicks in. Higher deductibles usually result in lower premiums, as the insurer’s liability decreases. Conversely, lower deductibles mean the insurer bears a greater financial responsibility, resulting in higher premiums.
  8. Additional Factors
    Factors like the shipper’s claims history, the packaging quality, and specific requirements for cargo handling can also affect the insurance cost. For example, poorly packaged goods that are more prone to damage may lead to higher premiums. Insurers might also offer discounts for shippers with a good safety record.

Cargo Insurance Premium Calculation Formula

The formula used to calculate cargo insurance premiums generally follows this structure:

Premium = Insured Value x Rate x Coverage Factor

  • Insured Value: The total declared value of the goods.
  • Rate: A percentage that reflects the risk level associated with the shipment.
  • Coverage Factor: Adjustments based on specific coverage terms or conditions.

For example, if the insured value of the cargo is $100,000, the rate is 0.5%, and the coverage factor is 1.2 (for all-risk coverage), the premium would be:

Premium = $100,000 x 0.5% x 1.2 = $600

Cargo insurance provides peace of mind for shippers, ensuring that goods are protected against unforeseen events during transit. Calculating the insurance cost requires a thorough assessment of these factors to balance risk and affordability effectively.