The cargo insurance gap may not be a demand problem alone. It may also be a product design problem.
For decades, economists have documented a persistent anomaly: people buy less insurance than would seem rational given their exposure to risk, even when coverage is offered at actuarially fair prices. This phenomenon, often referred to as the insurance demand puzzle, has been observed across health, life, catastrophe and many other insurance lines.
There are no equivalent studies for cargo insurance, but a regional proxy suggests the anomaly may also apply here. Over the past decade, most of the markets monitored by ALSUM¹ have seen cargo premiums lose economic relevance relative to GDP. Regional penetration remains around 0.03% of GDP and has been broadly stagnant for ten years.
Traditional explanations point to structural causes: cost, weak financial literacy, low trust, informality and regulatory shortcomings. All are real. Yet they seem insufficient to explain why formal companies, with access to insurance markets and adequate resources, also underinsure.
Behavioural economics offers an additional lens. A recent article by BeWay Consulting argues that buyers perceive the insurance premium as an immediate and certain loss, while the potential claim is viewed as distant and abstract. As a result, they systematically underinsure.
But there is another perspective that rarely enters the discussion. Irrationality may not be confined to buyers. The supply side can also behave irrationally, and unlike customer psychology, that is something insurers can directly influence.
Consider the product itself.
Research on supply chain disruptions², covering 827 disruption events, found that affected firms experienced substantial and persistent declines in shareholder value, along with lower revenues and reputational damage. Allianz’s Risk Barometer reaches a similar conclusion: business interruption and supply chain disruption consistently rank among the leading concerns of corporate decision-makers worldwide.
What cargo owners fear most is often not the physical loss or damage of the goods themselves, but the economic consequences of not having those goods available when needed. Yet the world’s most widely used cargo wording – the Institute Cargo Clauses – generally excludes those consequential losses by default.
This creates a potential mismatch between what buyers fear most and what standard policies are primarily designed to cover.
An even deeper disconnect may exist.
What insurers essentially sell is compensation after a loss has occurred. But clients do not truly want compensation; they want to avoid the loss in the first place. The greatest value lies not in paying for what happened, but in helping ensure it never happens.
This diagnosis is hardly new. McKinsey has argued that insurance is “struggling for relevance”, while Deloitte has suggested that future value creation will increasingly come from prevention and resilience rather than indemnification alone. The direction has been visible for years. The challenge is not understanding what needs to change, but actually changing it.
So what can be done?
Behavioural economics rarely corrects market irrationality with more rationality. Instead, it meets people where they are.
Three examples illustrate the point.
First, consequential loss coverage could be included by default, with underwriters opting out only where necessary. Defaults are among the most powerful behavioural tools available, and today they largely operate against the customer.
Second, renewal discounts could be triggered automatically through transparent parametric mechanisms tied to favourable loss experience. Rewarding good performance is not new. Making it objective, automatic and visibly linked to prevention is.
Third, insurers could introduce large-prize lotteries for customers that commit to prevention programmes and long-term insurance relationships. Such mechanisms take advantage of people’s tendency to overvalue small probabilities – a behavioural bias already used successfully in other industries to encourage savings and healthier behaviour.
All three proposals may sound unconventional within today’s cargo insurance market. Yet none is genuinely new. Automatic enrolment transformed pension participation. No-claims rewards are standard in motor and health insurance. Prize-linked incentives have been used for decades to encourage saving.
What is commonplace elsewhere still sounds radical in cargo insurance, and perhaps that gap says something about how slowly our sector evolves.
If buyers and sellers do not behave like homo economicus, insisting on ever more orthodox solutions may not close the protection gap. The irrationality of demand may ultimately require a supply side willing to be equally innovative, equally behavioural and, at times, equally unconventional.
If cargo insurance wants to close its protection gap, it may need less faith in the rational customer and more courage to redesign itself.
¹ Of the seventeen countries monitored by ALSUM, thirteen recorded lower cargo insurance penetration between 2014 and 2024. Only Mexico, Chile and Paraguay grew consistently. Argentina also showed growth, although exchange-rate distortions significantly affected the comparison.
² Kevin B. Hendricks (Ivey Business School, Western University) and Vinod R. Singhal (Scheller College of Business, Georgia Institute of Technology), based on an analysis of 827 supply chain disruption announcements between 1989 and 2000.
