Freight Insurance Pt 1 of 3

Freight Insurance Pt 1 of 3

8/28/2014 Umut Türker 2414 Times Read

9/11.
Captain Phillips and his cargo ship.

The serial train blasts in Mumbai on July 11, 2006.

Trucks at railroad crossings.

A lot can (and has) happen(ed) to planes, ships, trains and trucks.


When these things happen, lives and property are lost. Perhaps nothing can be done to alleviate the emotional loss incurred by the death of loved ones, but there needs to be some recompense in the loss of property, especially when it comes business transactions. This is where insurance comes in.

 

What is insurance? Virtually every adult has it and virtually every adult has several forms of it. People have life insurance, medical insurance, car insurance, home-owners insurance and others. Professionals, like doctors, will have insurance tailored to them, like malpractice insurance.

 

But what is insurance? Wikipedia defines it as "[T]he equitable transfer of the risk of a loss, from one entity to another in exchange for payment. It is a form of risk management primarily used to hedge against the risk of a contingent, uncertain loss" and goes on to say that it is a method "for transferring or distributing risk".


Perhaps it can be clarified by giving some theoretical examples. Let us say that Mr. Smith wants to be compensated $10,000 in case X happens. If an insurance broker determines that there is a very great chance that X will indeed happen, then he will want to make sure that he collects $10,000 from Mr. Smith (over a period of time) if he does decide to insure Mr. Smith.

 

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If the insurance broker determines that there is only a 1% chance that X will happen, then he may charge Mr. Smith $100 (or 1% of $10,000). If X does not happen, then the insurance broker has profited by $100. If X does indeed happen then he will lose $9,900.

 

If Mr. Smith pays $100 and X does not happen then Mr. Smith will lose that amount but that was a risk that he determined he would make.