Is cargo insurance worth the money?

What does the article picture have to do with cargo insurance? Nothing at all. It’s a photo of the vintage Airstream motorhome I wanted to buy to pair with my 1976 VW Bus. I wanted you to see how cool it was. There would be nothing better than heading to a festival towing a 1976 Bus by that rolling piece of art into an RV park. My daughter was all for it and was even excited. She exclaimed we would never have to buy another concert ticket with our own money again, ever! They would see us coming in our two piece automotive sculpture and just comp us into whatever music festival was being held and throw free adult beverages at us. The idea didn’t float very well with my wife. She was somewhat less excited than my daughter and I.  Her exact words were “Sure go head and buy it, but keep in mind you will be sleeping in it.” Needless to say I didn’t take the dare and remain vintage RV-less.

I thought doing a little RV’ing with a couple of classics would be great. It would give me the chance to talk about something other than cargo insurance. Usually once the inevitable ‘What do you do for a living?’ question comes along the conversation drifts to business and work related topics. If I bought the vintage motorhome it would drive the conversation a different direction. Alas, no motorhome and I will continue to go with the herd and talk about cargo insurance.

Sans one very cool RV towing a VW Bus, one of the questions I get asked in conversations is “Does every shipper of ocean container freight want to purchase cargo insurance?” Some people are a little surprised when I answer ‘no’. It’s not that cargo insurance isn’t a good risk mitigation tool for everyone because it is. It’s more a question of perceived value to the individual shipper.

Since no freight, containerized or not, is ‘loss proof’, the most common logic is you should want cargo insurance because it’s such a small cost for such a large benefit, why not get it? This prevailing sound logic is not shared by everyone. Here’s why; unlike the government of the United States of America, the insurance industry can’t operate on a budgetary modis operandi of spending more money than it makes. It takes an act of Congress to do that. In the real world ‘Golden Rule Number One’ of business physics followed by ‘for profit’ companies is they must earn more money than they spend. Even not for profits can’t spend more than they take in and keep the doors open. Insurance companies are no different.

Golden Rule Number One dictates an insurance company must earn more in premiums than it pays out in claims, overhead, and administrative costs. Since Golden Rule Number One is non-negotiable, insurers must charge more in premiums than it pays out in claims and costs. What this means to a shipper is if their cargo is well packaged and shipping with all proper precautions, over a long enough period of time a shipper would spend more in insurance premiums than freight losses on average. If a shipper trends toward receiving more money in claims than paying in premiums, this situation won’t last long. It is also a clear indication the shipper should take a long hard look at their transportation pipeline or hire someone to do so.

The more important question for a beneficial freight owner to ask themselves is how much money can they comfortably afford to lose at any one time? If you are General Electric that number is fairly high. If you are not General Electric the number may be a tad lower. What is your level of total physical cargo risk? It’s the total value of all freight in motion (being transported) you are at risk for until the risk is passed to someone else and the cargo has been fully inspected. It isn’t uncommon for losses to be claimed well after delivery as the damages are sometimes hidden.

If once a month a shipper ships X10 containers on the water headed to China Ex the USA valued at $50,000USD each container, the total risk exposure ceiling of physical loss of the cargo amounts to $500,000USD plus handling/disposal of damaged freight. It’s not all that impossible to accumulate value unintentionally. Today more than ever no matter how the containers are booked, they all may end up on the same mega vessel. In the event $500,000USD is a nonchalant loss for a shipper they can recover from and they can reship X10 containers of inventory to replace the lost X10 containers, and still have a happy day, they may question their desire to purchase cargo insurance. Over a long enough period of time, they will come out ahead if shipping standards remain high.

The picture for our example shipper gets even brighter if they only shipped one $50,000USD container a month. Their risk ceiling is much lower. Let’s look at the pay back of not spending money on premiums if one of the example shipments does succumb to risk and is lost. For an insured example let us use a cargo insurance premium rate of $150USD for Clause A ‘all risks’ insurance for a full container load of general merchandise valued at $50,000USD headed to China Ex the USA. For an identical uninsured example our cargo insurance premium rate is $0 for a shipment cost savings of $150USD. For the insured shipment in the event the cargo is lost as a result of a covered peril, it would take our insured shipper a reasonable number of weeks to file and collect on a claim. In our uninsured example our shipper would have saved the $150 premium per shipment, but would have to continue to ship their monthly uninsured $50,000USD container a little over 27 years to save as much premium money as to equal the lost uninsured amount. The 27 years of course being contingent on no more uninsured losses.

As I mentioned, cargo insurance is not something everyone wants.  For those with deep pockets, nerves of steel, and about three decades of spare time, the law of average is on their side. For the rest of us, it’s all about what can we afford to lose today? Me, I want the insurance. I insure needed things I would struggle to replace if lost and don’t try and time the stock market. Although you would have to admire the patience of a person who would wait more than 27 years to ‘pull one over’ on the cargo insurance industry.  That kind of dedication is hard to find. Maybe that’s a good thing.