Marine trade is an essential part of the global supply chain. Every day, millions of tonnes of goods pass through shipping routes. In 2019, shipping trade across the world was over $14 trillion. Such an enormous volume of financial transactions requires proper risk assessment and management of risks. Marine cargo insurance is one of the crucial tools for protecting against financial risks associated with marine trade.
So, let’s discuss how the cargo type and size of a vessel affect marine insurance costs.
What is marine insurance?
Marine insurance protects against financial risks due to loss or damage of a ship, cargo, or other properties while a vessel is in transit. This type of insurance policy may cover multiple perils like:
- Natural calamities
- Burglary
- Piracy
- Collisions
- Fire
- Chemical spillage
- Capsize
- Sinking
- Loading and unloading damages
- Sea perils
- Loss of cargo
Along with vessel owners and shipping companies, sellers and buyers of cargo can purchase marine insurance.
Some standard marine insurance coverages are:
- Cargo insurance
- Hull insurance
- Marine liability insurance
- Marine transit insurance
- Composite marine insurance
Let’s look closely at these forms of marine insurance.
- Cargo or freight insurance - It covers financial risks and protects a cargo owner against cargo loss or damage.
- Hull insurance - This type of marine insurance is for vessel owners or shipping companies. It covers any type of physical damage to a shipping vessel.
- Marine liability insurance - It is a protection against third-party financial liability of a shipping company if its ship causes damage to others’ vessels, ports, persons, or the environment.
- Marine transit insurance - This is another type of marine cargo insurance. However, such insurance covers cargo loss or damage from the point of origin to the final destination. So, as a cargo owner, you get protection from the time your goods leave the sellers’ warehouse till they reach the buyers’ premises.
- Composite marine insurance - It is a type of package or combination of different marine insurance coverages.
Irrespective of insurance coverage, the cost of the premium of a marine insurance policy may vary significantly depending on various external and endogenous factors.
Which factors influence marine insurance costs?
While purchasing marine insurance, the insurer may require a prospective policyholder to disclose information related to types of cargo, shipment, vessels, etc., as they can influence the risk of insurance and the cost of the premiums.
The cost of marine insurance coverage may depend on various factors like the following —
- Cargo type
- Vessel size
- Type of Coverage
- Value of coverage
- Shipping route
- Claim history of an insured
- Risk assessment of the insurance underwriter
- Condition of the marine insurance market
- Insurers’ pricing strategy
- Legal and regulatory cost of a jurisdiction
How does cargo type influence premium costs?
The type of cargo is a significant determinant of premium costs for marine insurance policies. Depending on the various characteristics of cargo, the cost of insurance premiums may go up significantly. These characteristics include the following —
- Value of cargo
- Risk
- Perishability
- Flammability
- Recoverability
Let’s understand these better.
- Value of cargo — The risk of insuring cargo goes up significantly when the value of the cargo increases. This is the most obvious relation between cargo and insurance costs.
- Risk — Some goods, like luxury items, precious metals, and high-value electronics, are more likely to get stolen or damaged while in transit. Insuring such cargo may require high premiums.
- Perishability — Perishable items like fruits, flowers, and food items can get damaged because of minor delays in shipping. So, insurers charge higher premiums for covering such cargo.
- Flammability — Chemicals, petroleum products, wood, explosives, and other flammable items attract high premiums because of associated risk.
- Recoverability — Insurers may sometimes reimburse the loss or financial damage to the insured and take ownership of the damaged cargo. They try to recover the damages paid by selling those damaged goods to suitable buyers. Goods that have little or zero recoverable value may attract high premiums.
How does vessel size influence premium costs?
The marine insurance premium is positively correlated with the size of a vessel. The reasons are —
- Larger ships lead to a higher accumulation of different risks for insurers as they carry a wide variety of cargo.
- Such vessels can be prone to collisions and cause bigger third-party damages.
- Incidents of fire and other accidents are higher in larger ships.
- Environmental liability of large ships can also run into millions of dollars, increasing the liability coverage for insurers.
However, larger ships are safer, and the chances of sinking or capsizing during transit can be low.
Conclusion
Marine cargo insurance is an essential component of conducting international trade. It helps manage financial risks associated with the export and import of goods. However, you should be careful about insurance terms and conditions to avoid excess spending on insurance premiums. Define your marine insurance needs and research insurance products thoroughly to pick the most suitable one.