Cost, Insurance, and Freight

Cost, insurance, and freight, or CIF, is one of the most frequently used terms in international business. It is a basis on which the exporter or seller quotes the price to the buyer or importer. When the seller quotes the price on a CIF basis, the total price includes the cost of the merchandise for the buyer, the premium for the insurance coverage for the merchandise from the seller's premises to the destination, and the transportation costs from the seller's premises to the destination.

As the distance between the buyer and the seller grows, transportation costs of the merchandise become important. Similarly, both the buyer and the seller need to protect themselves against accidents, loss of property, damages, or other unpredictable events such as the sinking of the ship carrying the merchandise or natural calamities such as cyclones and the consequent damage to the merchandise. For these reasons, quoting a price that includes insurance coverage and freight charges becomes very important.

In a CIF quotation, cost does not refer to the cost incurred by the seller or exporter in acquiring or producing the merchandise. From the seller's perspective, it is the price (without insurance and freight) at which the seller or exporter is willing to sell to the buyer. Obviously, how this price is derived remains entirely at the seller's discretion. Based on the seller's pricing strategies, the seller may choose to charge the full cost or below the full cost of the merchandise plus some markup.

Other terms that are also used in sales contracts include free on board (FOB) and cost and freight only (C&F). FOB quotations imply that the seller is responsible for all the costs up to the point where the merchandise will be boarded on a vessel or airplane and the buyer is responsible for paying the freight and insurance for the merchandise while being transported. C&F excludes insurance coverage and includes only cost of the merchandise and the freight charges. In this case, the responsibility for taking insurance lies with the buyer.