[Webinar] What You Need to Know About Cost, Insurance, Freight (CIF)
In the first webinar of 2017, Tyler Zaichkin explains everything importers need to know about buying their insurance on CIF Terms.
One of the most common methods for businesses to purchase their ocean marine cargo insurance is to purchase it with through their foreign supplier on CIF (Cost, Insurance, and Freight) terms. Although this method may be the simplest way to acquire insurance on your ocean cargo, most businesses do not fully understand CIF and how/if they are truly protected from a loss.
In order to explain this confusing and often misunderstood topic, Trade Risk Guaranty held an in-depth webinar explaining CIF and what a buyer can expect with this type of coverage. This CIF webinar covers the following topics:
- Terms of Sale/Incoterms – 04:14
- Cost, Insurance, Freight (CIF) – 05:34
- Sellers & Buyers Responsibilities & Risks – 06:38
- Common CIF Pitfalls – 09:09
- Cargo Insurance Coverage Comparison – 15:03
- Free on Board (FOB) Basics – 18:21
- FOB vs. CIF Example – 19:12
For more information of CIF Insurance, check out our previous blog post: “4 Reasons Buying on CIF Terms May Not Protect Your Business“.
— Trade Risk Guaranty (@TRG_Bond) February 7, 2017
Watch the Cost, Insurance, Freight (CIF) Webinar
View the Webinar Slides Below
Read the Full Transcript from the Webinar
CIF Term Insurance Webinar Introduction
00:28 – My name is Tyler Zaichkin I’m the National Sales and Marketing Manager at TRG. Been in this industry for five years and worked with all sorts of different importers from all over the country and all over the world who buy goods, who trade internationally. And a lot of them, a big percentage, in fact about thirty percent of you buy their goods CIF.
00:51 – So I’m excited to be talking about this here today.
00:54 – This webinar is brought to you by TRG, Trade Risk Guaranty. We’re located in beautiful Bozeman, Montana you can see our office here on the screen. We’ve got the whole second floor above the historic Rocking ‘R’ Bar. If you’re not
01:10 – If you’re not familiar with our building it’s been recently rebuilt after an explosion a few years ago. So it’s kind of a cool place to be here and an interesting place.
01:16 – We’re located about an hour north of Yellowstone National Park and we are the gateway. If you’re coming to the park we encourage you to come by and visit us.
01:24 – TRG is unique in its business model. We work directly with importers and exporters, directly with those participating in international trade. Rather than through a third party like a Customs Broker or Freight Forwarder or an insurance broker for insurance. And our direct model usually lowers our pricing, cuts out a lot of that third-party communication and helps importers be more efficient in both time and money.
01:51 – Over the past 25 years we worked with over 13,000 small businesses, large businesses, Fortune 500 companies, and we continue to grow to this day.
02:02 – I encourage you after the webinar, during the webinar, to join our Facebook Group: International Trade Professionals-TRG. This is a great place to come together and have discussions about the topics that we have in our webinars. Just pose questions that you may have about trade in general. In an easy, no-frills way.
02:29 – So really excited for that, please join us either during the webinar after the webinar we will send out a link to that group. I really appreciate it and would enjoy seeing you there.
02:35 – We will be recording this webinar and presenting it to you on YouTube afterward. So you can come back if you and missed the presentation, or if there is someone else within your company that wants to see the presentation, they can come see it in its entirety discussing these very in-depth topics and, specifically today, the incoterm CIF.
02:58 – If you have any questions whatsoever during the webinar I encourage you to ask them using the chat function of GoToWebinar. Now a few of you have posted some questions beforehand that I’ll be covering throughout the webinar. And then we’ll open up questions everyone at the end and I’ll be answering any questions you asked during the presentation.
03:37 – So today, we’re going to be covering a lot of topics. We’re going to start with what terms of sale are and specifically incoterms in international trade. We’re going to talk about the incoterm a lot today, CIF, Cost Insurance Freight.
03:40 – Specifically we’re going to look at the sellers and buyers responsibilities and risks when buying your goods with this term. And we’re going to talk about common CIF pitfalls. We’re going to look at the different types of insurance that you receive buying your goods CIF.
03:53 – And we’ll compare those against what a typical policy would be on a shipment by shipment basis through a Freight Forwarder or an annual policy through an insurance agency like TRG. We’re going to look at the incoterm Free On Board as well and use that as an example versus CIF of how the cost of insurance coverages would work.
What are Terms of Sale / Incoterms?
04:33 – So this isn’t talking about will you be paying check, or will you be paying credit card, or money transfer. This is specifically talking about who will be handling the movement, the payment, and the obligations of the entire process of the sale.
04:53 – Incoterms, specifically, are international terms of sales. So they are published by the International Chamber of Commerce and there are 11 predefined terms of sale in Incoterm 2010.
05:07 – They’re globally recognized by almost every country around the world and they clearly communicate the tasks, costs, and risks in that term.
05:15 – They establish the transition of ownership of goods which is a very important part when it comes to who is actually liable or who gets moneys if there is damage along the way.
05:29 – And that’s a point that we will be discussing in detail here today.
What is CIF Term Insurance?
06:01 – Now in this example, we’re going to be using the U.S. port as most of us here are U.S. importers or involved U.S. trade. But that’s what it defines is the cost includes the cost of the item, insurance, and then the freight to that destination port.
06:16 – The transfer of risks when buying CIF; the risk actually transfers from the seller to the buyer when the goods have passed the ship’s rail at the origin port.
06:26 – So if you’re buying goods from China when those goods are lifted and passed the rail of the ship, that is when you as the buyer would take ownership of the risk of those goods.
06:36 – Now, let’s talk about, specifically, the seller’s responsibility if you are buying on the terms CIF.
06:46 – So the seller is responsible for making sure that the goods are in conformity with the contract (they are the goods you ordered), they’re responsible for the packaging of the goods, they’re responsible for providing you with a commercial invoice, they’re also responsible for the export clearance and any duties of taxes associated with that, the origin terminal charges, the loading charges for the goods, the transportation charges to the named port of destination, and then minimum insurance coverage.
07:19 – So they have to provide all those things to you and that’s part of the terms of sale.
07:22 – As a buyer, you also have some responsibilities. You are responsible for any destination terminal charges; when it reaches the destination port you’re responsible for any terminal charges that may occur.
07:35 – You are also responsible for any assessed warehousing, examination, and any other fees or penalties that may come up. The import duties and taxes are your responsibilities, as well as the transportation arrangement and charges from that destination port to wherever the final destination may be.
07:53 – So those are the basics right there in exactly what CIF is; where you take ownership, what the risks are, what the selling party is responsible for,
08:02 – So let’s take a look at this in graphical form. So you’ll see here that it’s pretty easily laid out. In this graphic, the top orange bar define where the risk transfers so you’ll see here that in this graphic the risk transfers as the goods are being loaded onto the ship from the origin port.
08:27 – So that is where you, as a buyer, now legally own those goods and if there was damage to them, loss, you would be the person that receives any claims money.
08:40 – The seller’s responsibility in the bottom line, you’ll see, extends all the way until the goods reach the U.S. port. So they are still responsible for making sure the goods reach that port as far as paying for and arranging the freight and making sure everything gets there the way they’re supposed to.
08:57 – It’s when they reach the port that the buyer takes responsibility of those goods and any costs that may accrue after that.
09:06 – So CIF is maybe one of the easiest ways to buy your goods, other than delivered duty paid or DDP, CIF is a pretty easy way to buy your goods. You just pay one cost and you get your goods to the U.S. port and you’re responsible from there.
The Common Pitfalls of CIF Term Insurance
09:54 – Let’s start with the inflated commercial invoice value.
10:00 – An often occurrence when buying your goods CIF, is a commercial invoice that does not break out things like freight. Now as we know we pay duty as importers on the amount listed in the commercial invoice except some exclusions, we don’t have to pay duty on items like freight.
10:19 – Well because you pay, when you buy your goods you’re paying the price of the goods inclusive of freight and insurance, when that commercial invoice comes to you and when you file your duties, when you pay your duties, you’re often going to be paying on the total amount including the amount that you paid for freight.
10:40 – If you do, if you do have that manufacturer/supplier that does break out the freight, to avoid paying duties and taxes on that number has to be backed up by substantial proof and typically that is an ocean bill of lading stating exactly what the manufacturer paid for freight.
10:58 – That can be very difficult to get from the manufacturers, they often do not want you to know exactly what they paid for freight. So very common for companies that buy their goods CIF, is to pay duty on the freight itself which is a big extra cost that can be added to the value of your goods.
11:15 – So that can be an unexpected charged by itself but another unexpected charge that often happens to new or infrequent importers who buy their goods CIF is the destination terminal handling charges. So under CIF contract, unless it’s stated somewhere else, the buyer is responsible for any destination port terminal handling charges.
11:40 – So the THC, terminal handling charges, covers the unloading and discharge of containers from the vessel. Again this is often missed by infrequent importers and it’s inflated by CIF freight forwarders.
11:53 – So because the manufacturer, the seller, is actually taking those goods and choosing the freight forwarder that is moving them and that freight forwarder is the one who determines what the terminal handling charges are; when you get your bill, in the end, you have no ability to really negotiate or be a part of what that terminal handling charge is. So it’s often significantly more when buying your goods CIF then if you had arranged the freight yourself on terms like FOB, which we are going to talk about here in just a second.
12:25 – The next thing we want to talk about is the lack of control and visibility. Again the seller arranges the freight, not you. And so they’re often not choosing the best person to move the goods but the least expensive and least expensive is a nice way of saying the cheapest way to move them. That may result in a longer transit time or more often than not a riskier movement of your goods.
12:45 – Because when you’re buying your goods the manufacturer is in a foreign country communication can often be delayed and that can result in difficult or impossible changes to any contractor transportation. So even if you wanted to pay for a faster movement because communication can be so difficult it can be hard to even get things changed in a timely manner.
13:17 – A lack of control and visibility, I know, is one of the things that is the hardest for me. I’m someone that likes to be in control of things. So not being able to see it would drive me crazy.
13:28 – The last thing I want to talk about is the type of insurance coverage, the common pitfall, the type of insurance coverage that you receive when you buy your goods CIF.
13:43 – A couple of things; one is first the coverage does have to be at least 110% of the invoice value. So yes when you buy a good CIF you know that you are getting enough coverage. Enough dollar value of coverage, at least.
13:56 – It also must be purchased, by the seller, from a reputable insurance company. So you know that the company are getting it from will be able to pay out if there is a loss. Those are both good things.
14:08 – The geographic scope is going to be written from the port of origin to the port of destination so you’re getting that whole ocean transit, your whole risk, until you take ownership or you take responsibility at the U.S. port. So you know you’re getting that, another good thing.
14:22 – And if you do need to increase your coverage, you can often do that by paying extra charges. So if you need to add additional cart clauses or additional coverage that is something that you can do and pay more for.
14:36 – Here’s the downfall, here’s the biggest pitfall of buying it this way, is that the coverage that you’re receiving is the lowest amount of coverage available. So the minimum cover that must be offered when buying your goods CIF is Marine Cargo Clauses (C) of the Institute Cargo Causes. It can be similar clauses if somebody doesn’t write into these. But that is a Named Perils coverage so let’s talk about exactly what you’re getting there.
15:03 – Let’s compare Institute Cargo Clauses (C) with Institute Cargo Clauses (A). So Institute Cargo Clauses (C) is a Named Perils coverage meaning that you are only covered for the very specific things named in the policy.
15:20 – With Institute Cargo Clauses (C) those items are; fire, explosion, stranded, grounded, sunk or capsized vessel, collision or contact of vessel with an external object, discharge at a port of distress, general average, and jettison. That’s it, period.
15:41 – Heavy weather, not covered. Theft, not covered. The only things covered with an Institute Cargo Clauses (C) policy are those items listed.
15:50 – The exclusions, things that are very specifically excluded, are; wars, strikes, terrorism, nuclear incident, vessel and seaworthiness, willful misconduct, ordinary loss, wear or leakage, insufficient packaging, inherent vice, delay, and solvency of vessel operators, or deliberate damage or destruction of the goods.
16:11 – So not only are you only covered for a very little amount, you also have a long list of exclusions on top of that, that if those two mix you’re not going to be covered.
16:22 – Let’s instead look at the type of policy that a Freight Forwarder would offer you on a shipment by shipment basis or what you could buy on an annual basis from TRG.
16:30 – Marine Institute Cargo Clauses (A) is maybe the most common type of policy that you’re going to buy on an annual basis from an insurance agency or that you’re going to get on a shipment by shipment basis from a Freight Forwarder.
16:48 – This is not a Named Perils, instead it is an All-Risk. The difference being that with an All Risk policy everything is covered minus the exclusions. You don’t have to ask if it’s covered because it is unless it’s specifically excluded.
17:01 – So it’s all risk of loss or damage and general average are automatically covered. TRG, in addition to these, also offer some enhancement clauses that aren’t offered through every policy. For example; accumulation, debris removal, shortage from containers, concealed damage, control damaged goods, labels and brands, and then consolidation, deconsolidation, and repacking.
17:25 – Common exclusions written into an Institute Cargo Causes (A) policy are war, strikes, terrorism, nuclear incident, (war strikes and terrorism are typically added back into a TRG policy or a Freight Forwarder’s policy). Those are things that will typically also be included in the policy, covered risks. Vessel and seaworthiness, willful misconduct, ordinary loss, wear or leakage, insufficient packaging, inherent vice, delay, or insolvency of vessel operators are the common exclusions of this type of policy.
17:59 – So you can see right away the type of coverage that you’re getting from a CIF incoterm, is very very minimal. Whereas when you buy your insurance from a company like TRG or from your Freight Forwarder on a shipment by shipment basis you’re getting significantly more coverage. Now how much do you have to pay for that coverage?
Example Cost Comparison of Insurance Bought Shipment-by-Shipment VS CIF
18:28 – So what is FOB? When you buy your goods FOB, the price of the goods include; delivery on board the vessel nominated by the buyer at the named port of shipment, the transfer of risk happens at the same places CIF (when it crosses that rail), and the buyer’s responsible for everything from that point forward.
18:52 – So the seller has to get the goods on the ship that you determine and then you are responsible for all the freight from that point forward. You don’t have to worry about any export duties and taxes or export clearance that’s all handled by the manufacturer/the supplier, but you do have to get the freight insurance all of that from that point forward.
19:10 – So in this example we’re going to look at some very specific things. We’re going to be looking at a commodity of LED flashlights, for this example, we are using the classification 8513.10.2000. This carries a duty rate of 12.5%
19:28 – We’re going to be looking at full container loads to keep this simple and a full container load of these flashlights would include 432,000 flashlights. We’re going to be using the Port of Ningbo, China to Seattle.
19:42 – So let’s look at these two different importers. First Importer A; Importer A buys their goods using the incoterm FOB, Free On Board. They pay $1.12 per flashlight and they have three FCL shipments a year.
19:54 – They buy their goods, or, there buy their insurance, excuse me, on a shipment by shipment basis using the insurance or the Institute Cargo Clauses (A). They contract all of their own freight, as you would have to with FOB.
20:09 – Importer B buys their goods CIF. They pay a little bit more, just under 1% more, at $1.13 per flashlight. They have three FCL shipments the year as well and then their insurance is contracted by the shipper and the shipper contracts the freight as well.
20:29 – You’ll see that their insurance is Institute Cargo Clauses (C) because that’s what you would typically get when buying your goods CIF.
20:33 – Looking at the math for Importer A, we’re going to see that for s full container load they’re going to pay $483,840.00 dollars for the goods themselves. That’s a full container load of these flashlights. They’re gonna pay duty on those flashlights of $60,480.00 dollars. That’s 12.5% of that total number.
20:57 – The freight charges, of course it is Chinese New Years so the freight charges are a little bit more right now, but the freight charges they’re gonna pay are just under $2,300. Their insurance per shipment, at thirty cents per hundred, is about $1,500. So that means the total cost for their shipment is $548,075.16.
21:18 – Importer B, however, is buying their goods CIF. Their flashlights are a little bit more expensive, but that includes all of their freight and insurance. So they’re going to pay for $488,160.00 for those flashlights. Now because their manufacturer didn’t separate out the freight on their commercial invoice, they’re paying that 12.5% on the total amount, that total amount invoice number.
21:43 – So their duties are a little bit more, at about $61,020.00. That brings their total cost per shipment up to $549,180.00.
21:54 – Comparing the two, we see that the total cost with three shipments in a year for Importer A is 1,644,225.48. Importer B, buying CIF, pays more than that. They pay $1,647,540.00 a year. That’s a difference in cost alone of $3,314.52.
22:23 – So over the course of the year, Importer B is paying $3300 more and they’re receiving less than insurance coverage.
Example Cost Comparison of Insurance Bought as an Annual Policy VS CIF
23:03 – Importer B is paying the same, still by CIF, paying $1.13 per flashlight with three shipments a year and their insurance is still contracted by the shipper as well as the freight.
23:15 – In this example, example, you’ll see that importer A is paying the same amount for the flashlights, just over four hundred eighty-three thousand, their duty amount remains the same as well, their Freight remains the same, but their insurance in this example is significantly less. It’s four hundred dollars for the shipment and just looking at it as a total amount they paid for the year divided by three shipments. So that brings their total cost per shipment to $547,016.75.
23:39 – Looking at Importer B their cost remains the same they’re still paying $549,180.00 per shipment. The difference becomes clear after three shipments. There’s a difference of almost 6,500 dollars between what importer A is paying for superior coverage, control of their goods, just overall understanding of what’s going on versus Importer B who is leaving it all up to their manufacturer to contract with the cheapest supplier to contract with the cheapest supplier, a timeline that may be skewed, not understanding where your goods are, and then the end paying a lot more. 6500 dollars.
24:28 – So I want you to be able to calculate this for yourself and look at exactly what you’re paying so as such did create a specific worksheet, we have it available, that you can add both through Google (and use the Google sheets option) or through excel and plug in your own numbers for your shipments to find out exactly what you would be paying.
24:49 – If you need a freight quote, please call us we can get you in touch with our sister company, Strix, who would be happy to provide you with a freight quote. Same with an annual cargo insurance policy, I would love to provide you with what that would be. But on a shipment-by-shipment basis, you can calculate it at thirty cents for every hundred dollars that you ship.
25:06 – That’s very typical, $.30 to $.60 is what most Freight Forwarders charge for insurance and will give you a really good number. But see, what is the difference in cost? Are you going to save money? Are you going to lose money? Are you going to be getting better coverage? And the answer is yes. Are you can have more control? Yes.
25:22 – So CIF is a very easy way to buy your goods, but is it the best? And that’s a tough question to ask. It can be a very, very expensive way especially if you have a loss.
CIF Webinar Conclusion
26:07 – We talked about Free On Board, at least the basics of it. And then we looked at that example of FOB vs CIF.
26:12 – So in a second here I think a few of you’ve been asking questions throughout, but we’re going to be answering some of your questions and going through those different things.
26:23 – Before we get to that I want to quickly go over, again, what TRG is. We are an insurance agency. That is what we are. And we specialize in two insurance products; U.S. Customs Bonds and Cargo Insurance.
26:34 – And because we work directly with importers and exporters, directly with those participating international trade, our cost is generally less. There’s not a third party to pay in that process.
26:46 – So nothing changes, if you buy a bond or you buy cargo insurance with us, you can use the same manufacturers, you can use the same brokers, the same forwarders. Nothing changes.
26:55 – The only difference is that you’re typically paying less money and you’re saving time because you’re going directly to the source. There’s no third-party communication, there’s no third-party markup.
27:04 – Now with both Cargo Insurance and Customs Bonds we handle our claims in-house, so if you do have a claim with Customs on your Custom Bond, you can work with our licensed Customs Brokers who will help you work through that.
27:17 – If you have a claim on your Cargo Insurance, rather than work with a company where you’re not sure who you’re going to talk to, you’re going to be talking to our Cargo Insurance Specialist, Felicia, almost every single time.
27:23 – And she’ll be helping you out. She works with the same insurance underwriters, the same claims adjusters. So she’s very familiar, well known in the market and is going to be able to help you get the payout that you deserve.
CIF Webinar Questions and Answers
27:59 – So that you can look at it and say “am I getting the best? Am I, if I’m buying CIF, am I protecting my business? Do I know exactly what I’m getting? And this is just one way to look at it.
28:09 – FOB might be best and it looks like most of you (about forty-one percent of you) are buying your goods FOB now. That’s a very common, maybe the most common, way, as I’ve spoken to the Customs Brokers and Freight Forwarders of buying your goods because you don’t have to worry about the export duties, taxes, or paying those types of things. But the answer for you might be different than the answer for someone else.
28:33 – So what is the best way? The best way is to completely understand the different ways of buying it and choosing the best option for your company.
28:41 – A question was asked about, specifically, does TRG have insurance policies for exporting as well? The answer is yes. We write policies all over the world, so we can do both imports and exports. We can also do imports and exports of other countries.
29:01 – So if you were shipping from China to Argentina; that is a policy that we can offer as well. They’re not just import policies, they are policies that cover from ports and places in the world to ports and places in the world.
29:20 – Alright, so that looks like what we came up with today. If you have any questions whatsoever; please, please, please join our Facebook group: International Trade Professionals – TRG. Follow us on Twitter, follow us on Facebook, follow us on Linkedin, look at our Instagram stuff. Just follow it. We want to be sharing information with you constantly. The information that you need to know to make the best decisions for your business.
29:44 – I want to thank you again so much for coming in and joining us today. This is a huge part of our business, educating the trade community, and it’s so important to us that we can continue to share this knowledge and help you in any way possible.
29:57 – If you have any questions you can email us at firstname.lastname@example.org. You can also email me directly at email@example.com and I’d love to be there for you and answer any questions that you may have.
30:14 – So thank you so much! We’re going to get some emails sent out and Nick did share some stuff as far as the links to the worksheet. We’ll send that out in an email as well. If you have any questions whatsoever please contact us and thank you again so much for being here today.