While there is a right answer, it's not always the right answer.

One of the questions I am often asked by small to medium-sized importers/exporters is, “Should I use a yearly cargo insurance policy or per-shipment policy for my cargo insurance?” My answer is always a definite, ‘that depends.’

While volume plays a large role in whether a yearly policy or per shipment insurance is the right fit, it is not the only deciding factor. While it is probable companies needing coverage for five hundred shipments a month would benefit more from a yearly policy, what about fifty, twenty-five, or five a month? The line gets blurry and can only be measured by asking yourself what factors are important to you.

Last week I received an inquiry from an international trader who had a yearly cargo policy. The time for renewal was approaching, and the company decided it was time to do a little shopping. They told me their current yearly policy cost, the commodity, where the shipments originated and where shipped to, average values, and the current number of shipments per year. It was easy for me to do the math to let them know what number of shipments a year would be less cost per shipment and where the number turned the corner to make a yearly policy more economical. That calculation is the easy part, although other factors must be considered I can’t calculate.

Do you want a trackable direct expense for each shipment?

Some importers and exporters like to quantify everything that goes into a deal and apply those costs to individual shipments. For traders that have a yearly policy, unless they know exactly how many shipments overall they will insure that year, there is no way to calculate the actual cost of insurance for a given shipment with any accuracy. When this happens, yearly cargo insurance expense becomes a soft cost that may not be properly represented in the sales price. Per shipment allows the exact direct expense to align with the individual transaction.

Does your business use bank letters of credit (LC) for international transactions?

Banks have LC requirements, and some of those requirements include cargo insurance. The same applies to credit insurance companies. At the minimum, bank LC’s require a certificate for ICC Clause A ‘All Risks’ be supplied to them with the LC number printed on it. LC’s can also require specific verbiage on the certificate ranging from the certificate being payable in specific countries to making the LC bank the beneficiary. Per shipment allows greater flexibility in satisfying LC requirements. As a word of warning, if you do utilize LC’s and choose to use per shipment cargo insurance, don’t purchase the certificates just anywhere. Make sure the provider has experience with bank LC certificates.

Is your volume of shipments per year volatile?

I can safely say if you are insuring one-hundred shipments a month consistently year in and year out with predictable values, a yearly policy is likely the preferred way to go. Although if your volume isn’t quite so predictable, you should at least take a look at both yearly and per shipment cargo insurance. Insurers calculate premiums by estimating risk. Among other things, two of the factors insurers use is the number of shipments and the average values of the shipments. Once the risk is measured, the insurer will quote a yearly policy amount, and that is the premium you pay. If your yearly policy premium is based on twelve-hundred shipments for a given year, and you only ship eight-hundred at lower values than expected, while the insurer may lower the premium for the next year, you are not getting a refund for the previous year.

Per shipment allows you to pay for only for what you consume. For higher volume shippers, the tool of direct monthly reporting can be utilized to eliminate the labor of insuring per shipment. Once monthly reports are provided via a spreadsheet to the insurer to report the previous month’s shipments. The rates, terms, and conditions are all pre-negotiated. It is one of the few times you will pay for insurance after you use it.

In the case of very large volume shippers, the yearly policy is almost always the answer. In many cases, if a large volume shipper is dealing with the right insurance provider, they can source their cargo insurance wrapped in with other products from the same provider. For the rest of us, we must find out where the breakeven point is between per shipment and yearly is. Then we must decide which benefits of either fit our needs most.

So, to answer the question of should you use a yearly policy or per shipment cargo insurance to cover your shipments? The answer is Yes.