Author: Hunter_100
Date: 2022-11-09 01:43
An across the board 1% rate will not cover the losses unless their loss rate is significantly lower than 1/100.
Let's say you have 100 boxes to ship, and 99 of them have a $100 object inside. The 100th box is expensive and has a $10,000 object inside. If UPS charges 1% of value for each package, they will have collected $199 in insurance money. If you happen to lose one of the $100 packages, then UPS pays out $100 and has $99 in profit. But if they happen to lose the $10,000 box, then they are suffering a huge loss.
In a second scenario, lets suppose than instead of 100 packages, we now have 10,000 packages, with 9,999 of them valued at $100 dollars and the one expensive package is still worth $10,000. UPS collects their 1% fee which now equals $10,099. Now if they lose the expensive $10,000 package, their losses are covered by all the small package fees. And if they lose a few of the small ones, they still make a lot of profit.
The real rates are probably in between these two examples based on some complex risk model that UPS uses. But my point is that UPS or whoever uses insurance rates on cheap packages to cover potential losses on the expensive ones and make a profit in the event that the expensive packages make it to the destination intact.
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