Cargo Underwriting and Risk Assessment
Cargo Underwriting and Risk Assessment
This domain tests how a cargo risk is described, priced and controlled: what information is needed, how rate and deductible interact, and how exposures accumulate.
Information and rating factors
Key underwriting inputs: commodity and its sensitivity (breakage, moisture, theft, temperature), packing and containerisation, route and transhipment points, season and weather, mode and age/class/flag of vessel, port handling quality, carrier liability terms, loss history, and the Institute clauses selected. Sum insured is normally CIF value plus 10% for expected profit and charges. Rate is quoted as a percentage of the sum insured, often with a minimum premium, and is adjusted for deductibles, warranties and subjectivities such as a satisfactory packing survey.
Exposures that drive capacity
Underwriters must estimate probable maximum single casualty and accumulation: how much of the book sits in one port, on one vessel or one event (an earthquake at a hub, a typhoon, a container stack collapse). Aggregation across assureds and reinsurance recoveries is tested here.
Deductibles and franchises
A deductible is deducted from every claim; a franchise means no claim is paid until the threshold is exceeded, after which the whole loss is paid. Getting these the wrong way round is a classic error.
Worked example
An annual declaration cover for general cargo, estimated CIF value £8,000,000, ICC (A), 10% uplift, deductible £2,500, quoted at 0.20%, producing a deposit premium of £16,000 (adjustable on declarations). Five-year experience shows two claims totalling £240,000, i.e. £48,000 a year - a loss cost of 0.60% of the estimated value before expenses and profit. The 0.20% rate therefore projects a 300% loss ratio. The underwriter either raises the rate towards 0.75–0.80%, or increases the deductible to £25,000 to cut small-claim frequency, or narrows cover - each option changes the expected loss cost and must be recorded in the file.
Marks-losing traps
- Confusing deductible with franchise.
- Rating on commodity alone, ignoring route, packing and conveyance.
- Forgetting the 110% sum insured convention when testing adequacy.
- Ignoring accumulation and probable maximum single casualty when writing more line.
- Missing sanctions, war-zone or deck-stowage issues at binding stage.