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HOW TO CALCULATE INSURANCE PREMIUM

By Mr Old Man
Posted on August 17, 2011
4 min read
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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.
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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
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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
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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

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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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