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HOW TO CALCULATE INSURANCE PREMIUM

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Query from Monir

CIF=Cost+Insurance+Freight. If cost=10,000.00, Freight=1,000.00, what would be the insurance cost/premium? What would be the minimum insurance coverage amount? Assume that insurance premium/cost is 0.50% of insured amount.

My calculation goes, Insured amount is 110% of 11,578.95=12,736.85. Premium is 636.80.
————————

Old Man

I'm afraid it's miscalculated. 636.80 appears to be too big.
Just calculate simply as follows:
CIF = C + I + F
C = 10,000
F = 1,000
I = (C+F) x 0.50% = 55 (before 10%)
Total CIF value = 10,000 + 55 + 1,000 = 11,055
Amount to insure = 11,055 x 110% = 12,160.5
(Actual) insurance cost = 12,160.5 x 0.50% = 60.80
————————

Monir

Dear Old Man,

It’s sure my calculation is wrong. But in your calculation one thing seems conflicting to me.
First time u r calculating premium on (C+F) x 0.50% i,e. 55.
Second time u r calculating premium on (C+F+I)x 0.50% i,e 60.80.

IF we consider,
C=(10,000 + 10%)=11,000
F= (1000+10%) = 1,100
Total = 12,100

So, premium should be 12,100 x 0.50%=60.50 . Then, CIF value at 110% would be 12,160.50
————————

Old Man

Hi,

Please note that 55 is just base premium, the actual premium is calculated step by step as follows:

1) (Cost + Freight) x Insurance Rate = Base Premium
(10,000 + 1,000) x 0.50% = 55 (Base Premium)
2) (Cost + Base Premium + Freight) x 110% = Insured Value
(10,000 + 55 + 1,000) x 110% = 12,160.5 (Insured Value)
3) Insured Value x Insurance Rate = Premium
12,160.5 x 0.50% = 60.80 (Actual Premium)

Hope it is clear.

Regards,
Mr. Old Man

P/s: You can google to find out various formulas to calculate insurance premium, they all give the same result.

Try the following formulas to calculate insurance premium and insurance amount at 110% CIF or CIP value:

P=(C+F)1.1R/(1-(1.1R) ; A=1.1(C+F)/(1-(1.1R)

Wherein:
P = Insurance premium
C = Cost
F = Freight
A = Coverage amount
R = Insurance rate

————————

Monir

Thank you Old Man, u r not old, u r evergreen. Now it is clear to me. Pls tell me one thing more, what costs/expenditures are covered by the extra 10%?

————————

Old Man

Hi,

There are different intepretations of the increased value of 10% higher than CIF or CIF value:

Some sources say it represents an expected profit, i.e., if the goods arrives safely at the destination, the consignee may gain profit of 10% by selling them. This expected profit is insurable, and is normally added to the insured amount of cargo itself by fixing it at 10% higher than the CIF value thereof; or it represents an increase value where the market price of the goods increases during the voyage and the goods are lost or arrive at the destination in a damaged condition, the consignee may suffer a loss of the increased value of the goods.

Some other sources say the increased value of 10% is to cover incidental costs like processing claim, survey cost, possible inflation costs of replacement.

Regards,
Mr. Old Man

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10 Comments

  1. anonymous

    July 6, 2012 at 3:07 pm

    Anonymous writes:export goods CIF values to 1 k.g 300 price . one agent to commision give u 7.5% . buyer CIF price 7.5% price . so agent 7.5% earn to exporter 1 k.g to 300 price earn to them.so plz mr old man my problems solve it …. so rlpy to my id so [email protected]….so request ….

    Reply

  2. anonymous

    August 28, 2013 at 11:08 am

    Anonymous writes:Old Man Hi, Please correct me if I am wrong in interpretation.as per MIA 1906 S 16.3 expenses related to shipping can be added for insurance purpose.The cargo value is dynamic & Ex. works value differs than value at final destination considering freight,clearing & forwarding charges etc.Therefore 10% are added for buyer at final destination for clearing ,handling & local transportation etc.Please note that 10& are not added on FOB & or CFR terms of sale & FOB insurance cover.In my opinion price escalation due to exchange rate fluctuation being speculative risk is not covered.Thus benefits of 10% increased value can not be taken by seller.With Kind regardsAshok G,Kar

    Reply

  3. anonymous

    August 28, 2013 at 5:08 pm

    Anonymous writes:A = % premium rating10% increased valueFirst work out provisional premium & % by following formula(A+10%)*100/100-(A+10%)

    Reply

  4. mroldmanvcb

    August 29, 2013 at 5:08 pm

    Sorry I have been unable to access my opera these days due to being prevented. Not sure to understand your question, but please note that under FOB, CIF and CFR terms the risk is transferred from the seller to the buyer when the cargo is shipped on board. So, the buyer is compensated only under CIF term. If buying under FOB or CFR terms, the buyer would buy insurance to cover the risks. As seen in practice, the buyer would buy insurance for 100% CIF value instead of 110%.

    Reply

  5. Nhân

    February 21, 2017 at 9:59 am

    Dear Mr Old Man,
    Em có 1 trường hợp muốn tham khảo ý kiến của anh ạ,
    Ngân hàng em là ngân hàng xuất khẩu, L/C yêu cầu chứng từ bảo hiểm, trong bảo hiểm có ghi chú: bảo hiểm chỉ có hiệu lực khi phí được trả.
    Ngoài ra bảo hiểm cũng thể hiện thông tin về ngày trả phí bảo hiểm, nó có 2 ngày: due date: là 1 ngày trong quá khứ; payment date: là 1 ngày trong tương lai chưa xảy ra; bên em nêu ra lỗi: không xác định được phí được trả hay không vì nó chưa xảy ra, do đó không xác định được bảo hiểm có hiệu lực hay không?
    Theo anh lỗi nêu ra có chính xác không ạ, với khía cạnh là ngân hàng của nhà xuất khẩu, có thể làm gì để khắc phục lỗi này ạ (công ty bảo hiểm không sửa chứng từ bảo hiểm)
    Em rất muốn nghe ý kiến từ anh ạ
    Em chân thành cảm ơn.

    Reply

    • mroldman

      February 27, 2017 at 8:31 am

      Agreed with you

      Reply

      • Nhân

        March 2, 2017 at 10:07 am

        Dear Mr Old Man,
        Em cảm ơn anh nhiều ạ. Em cũng đã search để tìm ý kiến của ICC về case này nhưng vẫn chưa tìm ra; nếu anh có thì có thể cho em xin không ạ?
        Em chân thành cảm ơn.

        Reply

      • mroldman

        March 2, 2017 at 10:27 am

        ICC has no opinions on this issue

        Reply

    • Rafael del Campo

      April 5, 2017 at 6:58 am

      Hi, this is the text that appears in the above lines. Could someone translate it please
      thanks Rdq / Peru

      /Dear Mr Old Man,
      Em có 1 trường hợp muốn tham khảo ý kiến của anh ạ,
      Ngân hàng em là ngân hàng xuất khẩu, L/C yêu cầu chứng từ bảo hiểm, trong bảo hiểm có ghi chú: bảo hiểm chỉ có hiệu lực khi phí được trả.
      Ngoài ra bảo hiểm cũng thể hiện thông tin về ngày trả phí bảo hiểm, nó có 2 ngày: due date: là 1 ngày trong quá khứ; payment date: là 1 ngày trong tương lai chưa xảy ra; bên em nêu ra lỗi: không xác định được phí được trả hay không vì nó chưa xảy ra, do đó không xác định được bảo hiểm có hiệu lực hay không?
      Theo anh lỗi nêu ra có chính xác không ạ, với khía cạnh là ngân hàng của nhà xuất khẩu, có thể làm gì để khắc phục lỗi này ạ (công ty bảo hiểm không sửa chứng từ bảo hiểm)
      Em rất muốn nghe ý kiến từ anh ạ
      Em chân thành cảm ơn.

      Reply

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