How are cargo insurance rates calculated?

I have written several blogs on the subject of cargo insurance and related risk mitigation. I sell those services so writing articles on those subjects makes sense. Yours truly writing about the finer techniques of arc welding wouldn’t be very useful. In the past articles I covered many basic topics including, why you want cargo insurance, how Incoterms matter for cargo insurance, forwarders policies, general average and other related subjects. Rather than list the blogs and posting multiple links to each, you can find them all in our blog section for a full list.

For this article I will get more granular on one subject important to shippers and beneficial freight owners who are often the loss payees. I chose what is most important by using the very scientific method of looking at what questions people ask me most often. I know, very Albert Einstein of me. Recognizing there is cargo insurance for ground, ocean, and air shipments; to keep things simple I will use full container load (FCL) ocean shipments as the consistent mode of transport example.

For new, and not so new shippers, understanding rates for marine cargo insurance, sometimes referred to as ‘shipper’s interest insurance’, and how they are calculated is a common question. One thing that trips people up most is different rates and conditions for shipments having the very same insured value. It seems not to make sense, although from an insurance company’s perspective it makes perfect sense.  Insurance companies sell risk exposure. For a fee, the insurer will accept a stated financial risk for losses, in this case cargo, as a result of agreed perils. The variable is not all risks are created equal. In a simplistic view, for rating and setting conditions for cargo insurance, information insurers can use includes:

Who (who is the shipper and do they have a shipping history full of claims?)

What (What is the commodity? Is it iron pipe or Waterford Crystal?)

When (When does the risk begin and when does it end?)

Where (Shipping from and shipping to?)

*How (How is the cargo packaged and transported?)

*I know, another ‘W’ (why) would be cooler, but it doesn’t fit the need.

Why do those things make a difference? I thought you’d never ask. As an example, let us say you are an insurer. One of your products is ‘punch in the face’ insurance. You charge a premium to the policy holder for the insurer (you) to accept the risk of the insured getting punched in the face. If receiving a punch in the face is eminent for the insured, you as the insurer assume the risk and step in front of the insured and take the punch in the face for them. Tough job, but it’s a living. Since punches in the face are not exceptionally prevalent in most normal people’s everyday life, the risk is small and the premium and conditions are very agreeable.

Now let us consider the insured is voluntarily attending one, or more, of the many riots (formally known as peaceful protests) popping up here and there wearing a tee-shirt with writing on the front disparaging one side of the argument and writing on the back of the shirt disparaging the other side of the argument. You being the person (insurer) whose job is to take a punch in the face on the insured’s behalf, may feel the insured just increased the chance of you getting punched in the face. You bet they did. It would be understandable if you, as the ‘punch-ee’ (insurer), would require a higher premium to burden the higher risk. Cargo insurance and risk share much of the same logic. One example is, everything else being equal, shipments exiting the USA bound for the United Kingdom (first world country to first would country) would be less premium cost than shipments exiting the USA bound for Algeria. In the example, the later destination raises the risk to the cargo thus commands a higher premium.

Considering the… who, what, when, where, and how list earlier in the article, it’s easy to see the origin of a shipment and the destination of a shipment is just one measurement an insurer must consider. Insurers don’t always use rate to mitigate risk. Sometimes the insurer will raise the deductible or add risk limiting conditions. Iron pipe shipped to France will be lesser premium than expensive consumer electronics shipped to the same destination. The electronics may have a higher rate, higher deductible, added conditions, or a combination of all three.

Now that you are getting a feel for what insurers look at when calculating the rate and why there are variables, let’s see what a rate looks like. Often an insurer will express rates using a %. For instance, if we ask an insurer for a cargo insurance rate to ship non fragile machine parts, FCL, ocean, USA door to Australia door, with no specific total sum insured mentioned but rather a range such as $30,000USD to $50,000USD, the answer may look like 0.31% with a $35USD minimum premium, Clause A conditions, with the possibility of some sort of low deductible. Okay, what the heck does 0.31% mean? That number is the percentage used of total value that would calculate out to the premium. To be more specific: Value x % = Premium. Using the 0.31% rate mentioned earlier and a $40,000USD total sum insured (TSI) and it would look like this: $40,000 x 0.31% = $124USD insurance rate for the example.

So there you have it, the most often requested question segment answered. Of course there are other questions, but there is only so long I will write and only so long you will read. Any article pressing 1000 words turns into a first class sleep-aid with none of the nasty side effects. If you, or someone you know, have a specific question about cargo insurance or related risks, e-mail it to me at and on no specific schedule I will answer you in a follow up blog. Yep…sort of like a ‘Dear Abby’ for cargo insurance and risk. I will answer privately if preferred or if there is any proprietary information that can’t be sanitized out without diluting the answer. If I can’t answer the question I will do my best to direct you to someone who can. Answers to questions without having to sit through a sales presentation? Wow, who would have thought?