Cost Insurance and Freight, What’s the Difference from FOB?

Have you ever heard the terms cost insurance and freight in trading activities? Or are you directly involved in international trade activities or connected with foreign organizations? There are various rules and regulations governing the items that you can send, the allowed shipping methods, and the allowed shipping destinations.

This article will discuss all information about expenses, insurance, and the shipping process. We will explain the definition and mechanisms involved. Additionally, various obligations of buyers and sellers will also be discussed, along with other topics. Get to know more in this TransTRACK article!

What is meant by Cost Insurance and Freight (CIF)?

Cost, Insurance Free is a term commonly used in international trade that refers to the cost of transporting goods from the seller to the buyer. CIF is a type of Incoterm, which stands for International Commercial Terms, which defines the responsibilities and obligations of buyers and sellers in international trade transactions.

Understanding cost insurance and freight is essential for anyone involved in international trade, because CIF can have a significant impact on the costs and risks of buying and selling goods.

In simple terms, cost and freight refers to a pricing term that includes the main value of the goods, the cost of insurance coverage and the cost of shipping. When buyers make purchases under CIF terms, they have an obligation to pay the price of the goods to the seller, as well as bear insurance and shipping costs so that the goods can be transported until they arrive at the port of destination.

Meanwhile, the seller’s duties include arranging and paying for the delivery of the goods to the port of shipment, as well as obtaining insurance protection for the goods while in transit.

Why is CIF Important in Trading Activities?

One of the main benefits for sellers is the opportunity to obtain insurance at a more affordable cost through the use of CIF. Once a primary insurance policy covering shipping costs has been obtained, the seller can incorporate these costs into a sales invoice which will be charged to the buyer.

The sole advantage of CIF for buyers is that they do not need to process a shipping declaration with their own insurance company because the responsibility and costs of insurance are already taken care of and paid for by the seller.

Which is Cheaper, FOB or CIF?

Free on Board (FOB) agreements are much more cost-effective compared to agreements that include cost, insurance, and transportation (CIF). This is due to the fact that in FOB, the buyer has more control over the logistics process of the shipment, including insurance and freight costs. Buyers can contract with carriers of their choice and obtain the appropriate level of protection they wish to insure their shipments.

CIF components

Let’s examine the specific responsibilities that sellers and buyers have when they agree to a sales transaction using CIF delivery terms.

Seller Responsibilities

• Fulfillment of delivery of goods and related documents
• Packaging process
• Land transportation arrangements in the country of origin
• Management of customs fees in the country of origin
• Expenditures in the country of origin
• Organizing cross-border shipping
• Insurance coverage for cargo

Buyer’s Responsibilities

• Payment for Goods, Duties and Taxes
• Expenditures in the recipient country
• Management of customs handling fees in the recipient country
• Land transportation arrangements in the recipient country

Risk Transfer

It is important to note that in international shipping, there are different points of change of responsibility and costs between buyers and sellers, depending on the type of shipping agreement in place. In the CIF context, changes in responsibility occur at a different point than changes in costs. The details contained in the agreement will determine when responsibility for the goods passes from the seller to the buyer.

Because the seller is responsible for shipping, transportation and insurance costs until the goods arrive at the buyer’s port of destination, changes in costs take place when the goods have reached the buyer’s port of destination.

However, a change in responsibility occurs once the goods have been loaded onto the ship, from the seller to the buyer. Even though it is the seller who has to buy insurance, once the goods are loaded onto the ship, ownership of the goods passes to the buyer. In the event that the goods are damaged during transit, the buyer’s duty is to submit a claim to the seller’s insurance company.

Special Considerations

Situations where the buyer is only responsible for the risks once the cargo has been loaded onto the vessel may make a CIF agreement less appropriate. For example, in shipping cargo in containers, the goods may have to be held in the container for several days before finally being loaded onto the ship at the seller’s port.

In accordance with the CIF principle, the buyer will face risks because the goods will not be guaranteed insurance while they are in the container and waiting to be loaded onto the ship. As a result, in such situations, agreements based on CIF may not be suitable, especially for shipments involving containerized cargo.

How to Calculate Cost Insurance and Freight

Calculating the CIF value of a product is a simple process. The name “CIF” itself describes the three main elements of this value – namely Cost, Insurance and Freight. Generally, the responsibility for the CIF value lies with the seller, and this applies to products transported by sea, ocean or other waters. Apart from costs, insurance and transportation, the CIF value also includes extra expenses incurred in the context of shipping the product until it reaches the border or port of the recipient country.

So, in calculating the actual CIF value for your product, you need to add the following values.

• Main value of goods (according to agreement between seller and buyer)
• Insurance protection until the goods arrive at the recipient port
• Transportation expenses required to deliver goods to the port of destination

Not only that, there are other additional expenses that must be borne by the seller and are generally incorporated in the CIF value.

• Cost of loading goods for delivery
• Customs inspection fees
• Route adjustment fees, if necessary
• Management of export documents and customs duties
• Replacement for damage to shipping (if not insured)

All of these expenses contribute to forming the CIF value on special shipments. This value will reflect financial responsibility towards all parties involved in the delivery, including the buyer and insurance institutions.

Conclusion

In the world of international trade, a deep understanding of terminology such as cost insurance and freight (CIF) has great significance in spurring transaction success. Through CIF, which clarifies the division of responsibilities and insurance coverage, the export and import process becomes simpler. This provides a sense of security and accuracy for both buyers and sellers. By eliminating potential misunderstandings and maximizing the benefits offered by CIF, businesses can confidently navigate the complexities of the global trade landscape.

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Therefore, FMS from TransTRACK is the right solution for goods transportation companies who want to increase operational efficiency and maintain the quality of their deliveries. Find more information about Fleet Management Systems from TransTRACK on our website or contact our team for a free consultation.

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