LOGO
Chapter 3
TRANSPORTATION, INSURANCE,
PAYMENT IN FOREIGN TRADE
INSURANCE
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Insurance of goods in foreign trade
Insurance means a commitment of the insurer to indemnify the assured
against damages and loss due to agreed risks corresponding to a paid
insurance premium.
The risks in cargo insurance
Risks are accidents, disasters or incidents that occur
unexpectedly, randomly or threats when occur will
cause loss to the matter of insurance.
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Types of risk
Based on the Based on Insured
source of the risk risks
• Natural disasters: (Act of God) • Normally insured risks
• Maritime Risks (Perils of the • Individually insured risks
sea) • Uninsured risks
• Other types of risks
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Loss in cargo insurance
Losses are damages, injuries of the subject-
matter insured due to risks
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Types of losses in cargo insurance
❖ Based on the level of loss:
❖ Partial loss is part of the subject-matter of insurance that is
damaged or lost
❖ Total loss means the whole insured subject has been damage or
irreparable or be used
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Types of losses in cargo insurance
❖ Based on the characteristics of loss:
❖ General loss: is a loss to general security, a sacrifice to the general
good or a general harm.
❖ Private losses: loss and damage of the matter of insurance due to an
accidental, incidental risk. For whom this loss occurs, the person
will suffer loss.
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Types of cargo insurance
Exclude private loss
London Insurance Include private loss
Institute Include all risks
Institute Cargo Clauses C
1963 (ICC) Institute Cargo Clauses B
Institute Cargo Clauses A
( + 18 exclusion risk condition and exclusion risk < 3%)
Institute Cargo Clauses C
1982 (ICC) Institute Cargo Clauses B
Institute Cargo Clauses A
Institute War Clauses
Institute Strike Clauses
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Types of cargo insurance
❖ According to ICC 1982: In 1982, a clearer classification
from basic to various forms of insurance was introduced,
including:
✓ Institute Cargo Clauses A
✓ Institute Cargo Clauses B
✓ Institute Cargo Clauses C
✓ Institute War Clauses, cargo applied to goods transported
by sea
✓ Institute Strikes Clauses, cargo applied to goods
transported by sea
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Institute Cargo Clauses C
❖ Covered risks include:
✓ Fire or explosion
✓ Ship or barges were stranded, sunk or capsized
✓ The ship collided with other vehicles or objects that were not water or were missing
✓ Unloading at the place of refuge
✓ Road vehicles were derailed or subverted
✓ Sacrifice for general average
✓ Throw the goods into the sea
❖ Losses, expenses and liability of the insurer
✓ General losses and rescue costs are calculated and distributed according to the contract of
carriage and / or according to applicable laws and practices.
✓ Both to blame collision clause: The insured's responsibility when both ships collide and
both are at fault 11
Institute Cargo Clauses B
❖In addition to the risks covered under condition C,
there are also the following additional risks:
✓ Earthquakes, volcanic eruptions, lightning strikes
✓ Water pulled goods from the ship
✓ Sea water, rivers and lakes flowing into ship tunnels,
barges, means of transport, containers or cargo places
✓ Total loss of any package that falls from the ship or
falls during loading, unloading on board and barge
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Institute Cargo Clauses A
❖Contents of institute cargo clauses A are:
✓To be compensated for any loss, damage or
expense of the subject-matter of insurance
except for exclusion risks such as conditions
B and C.
✓In addition, there are additional conditions to
be compensated for risks caused by
intentional damage or vandalism not caused
by the insured.
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Question
During a sea voyage, the ship crashed. At the port of destination, the
loss of goods is as follows:
Goods burned by lightning, damaged $3000
Goods soaked in rain, damaged 1000 USD
10 parcels worth $2000 fell onto the wharf during unloading at the port
of destination, with a loss of 50% of the value
Goods were dropped due to damaged packaging, loss of 500 USD
The cost to replace the damaged packaging is 100 USD
Contribution to the general average of the shipper is 2000 USD
How much is the shipper indemnified if the shipper is insured
under conditions A, B or C – ICC 1982. 14
General exclusion risks
❖ Loss, damage or expense due to the insured's willful act
❖ Normal leakage, normal loss in weight or natural erosion of the matter of insurance
❖ Loss, damage or expense due to incomplete or inappropriate packaging
❖ Loss, damage or expense due to inherent vice or the nature of the matter of
insurance
❖ Loss, damage or expense as a direct cause of delay whether or not the delay is
caused by a covered risk
❖ Loss, damage or expense due to the ship's inability to repay debts or financial
deprivation, ship managers, charterer or operator.
❖ Deliberate damage or intentional destruction to the matter of insurance by the
wrongdoing of any person
❖ Loss, damage or expense resulting from the use of any war weapon involving
nuclear or radioactive energy.
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Excluded risks due to transportation
❖Insurance does not cover loss, damage or expense
caused by:
❖Ships or barges are incapable of sailing;
❖Ships, barges, other means of transport, containers,
wagons are not suitable for safe transport of goods for
which insurance buyers or their employees know the
conditions mentioned above when loading goods onto
those vehicles and transport tools.
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Risks excluding war risks
❖ In no case shall compensation for loss, damage or
expense resulting from the following:
❖ War, civil war, revolution, rebellion, insurrection or
hostile action caused by or against a force to fight.
❖ Captured, confiscated, arrested, restrained (not including
pirates), and the consequences of such actions
❖ Bombs, mines, torpedoes or other war weapons left over
from battles.
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Risks excluding strike risks
❖ In no case shall compensation for loss, damage or
expense resulting from the following:
✓ Strikes, banned workers, or anyone involved in a labor
disorder, violence or civil rebellion
✓ Strikes, factory bans, labor disorders or civil riots
✓ Terrorist or anyone acting on political motives
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Insurance value, insurance amount and
insurance fee
1. Insurance value = value of the matter of insurance at the
beginning of insurance + insurance fee + other expenses
• Insurance value of goods = freight cost at the port of departure (C) +
insurance fee (I) + freight to port of destination (F) = CIF or CIP price
• When exported under FOB or CFR terms, the insurance value is calculated by
the CIF of the item.
• To ensure benefits, the insured can also insure the expected interest of the
import and export.
• Therefore, the insured often buys insurance value = (100% + 10%) of CIF or
CIP price
1. Insurance fee (I) is calculated according to the ratio of insurance
fee (R) or insurance rate: this is the price set by the insurance
company and depends on the nature of the goods or means of
transport that R is high or low.
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Calculation of premiums and conversion
of FOB & CIF prices
❖ Premium = Premium rate x base value of insurance product. The
calculation formula is I = R. CIF
❖ Base value of insurance products = Value of initial goods +
Insurance fee + shipping fee. The calculation formula is CIF = C
+I+F
❖ When the value of the insurance product's base is not expressed or
incomplete in the foreign trade contract, it shall be calculated as
follows:
❖ CIF = C+I+F change I = [Link] we have: CIF= C+[Link]+F
✓ Therefore, CIF - [Link] = C + F or CIF (1-R) = C + F
✓ So CIF = (C + F) / 1-R
✓ And when buying under the condition of 110% of the value of the subject of
insurance we have: CIF = (C + F) / 1-1,1R 20
Extra insurance products
❖ War insurance conditions apply to goods transported by sea
(Institute War Clauses, cargo)
❖ War insurance conditions apply to air freight (Institute War
Clauses, air cargo)
❖ War insurance conditions apply to goods transported by post
(Institute War Clauses, sending by post)
❖ Conditions of strike insurance apply to goods transported by sea
(Institute Strikes Clauses, air cargo)
❖ Conditions of strike insurance apply to goods transported by air
(Institute Strikes Clauses, air cargo)
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INTERNATIONAL PAYMENTS
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International payment
1. Cash
2. Telegraphic transfer
3. Collection of payment
4. L/C
1) revocable L/C)
2) irrevocable L/C)
3) at sight L/C)
4) usance L/C)
5) transferable L/C)
6) Revolving L/C)
7) Anticipatory L/C)
8) standby L/C)
9) Back-to-back L/C)
…..
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Cash
(2)
Importer Exporter
(1)
(1) Payment
(2) Shipment
•Pros:
•Simple
•Cons:
•Risks on the time of payment and the time of delivery.
•Risk management and delivery of goods
•Checking money quality is difficult.
•Apply when: Direct cross-border trading
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Telegraphic Transfer
TT before shipment
(1) Sale contract
Importer Exporter
(5) Goods are shipped
(2)
Payment (4)
request Payment
is advised
Importer’s Bank Exporter’s Bank
(3) Bank
arrange
transfer
Telegraphic Transfer
TT after shipment
(1) Sale contract
Importer Exporter
(2) Goods are shipped
(3)
Payment (5)
Instruction Payment
s is advised
Importer’s Bank Exporter’s Bank
(4) Bank
arrange
transfer
❖ Advantages:
▪ Simple, convenient
▪ Guaranteed money quality and safety in delivery.
❖ Disadvantages:
▪ Risks on the time of payment and the time of delivery.
▪ Transfer money by mistake, excess or deficiency. Bank does not
accept any responsibility.
❖ Apply when: Buyer - seller have a regular, trusting or
dependent relationship.
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Collection of payment
Drawee Drawer
(Buyer/Importer) (Seller/Exporter)
(0) Contract
(1) Shipment +
invoice and
documents
(4) (2)
(5) Pay
informs Submit Draft (7)
the
the (Bill of Payme
Draft
importer exchange) nt
about And
the Draft collection
order
(3) Send Draft and collection
order
(6) Payment
Collecting Bk/ Remitting Bk
Presenting Bk (Seller’s Bank)
(Buyer’s Bank)
Collection of payment
Document against payment
Export
Import
(0) Sale Contract
(1) Shipment
of Goods
(4) (7)
(5) Credit
informs
Payment (2) paymen
the
and Submit Draft, t
importer
receive Documents and
about the
document collection order
arrival of
s
document
s
(3) Pass Draft, documents and
collection order
(6) Payment
Remitting Bank
Collecting Bank/
Presenting Bank
Letter of Credit
A letter of credit is an arrangement in which the bank opens the letter of
credit (the buyer's bank) at the request of the buyer, will pay a certain
amount of money to another person (the seller, the beneficiary). ) or
accept a bill of exchange drawn by the seller when the seller presents
to the bank a set of documents in accordance with the provisions of the
letter of credit.
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Letter of Credit
(6)
Exporter’s bank Importer’s bank
(Advising L/C bank) (Issuing bank)
(2)
(5) (3) (1) (7) (8)
Contract
Exporter Importer
(4)
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Types of Letter of Credit
❖ Confirmed, Irrevocable L/C)
▪ A letter of credit can’t be cancelled yet confirmed by another
bank to guarantee payment at the request of the issuing bank.
▪ Used when the buyer's bank and the seller's bank don’t have a
relationship or the seller's bank doesn’t trust the reputation of the
buyer's bank.
▪ This type of L/C is the most secure for the exporter. The cost of
opening L/C of the importer is higher.
▪ This method is usually applied to first-time direct sales.
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Types of Letter of Credit
Confirming bank (2)
(2)
(6) (6)
Exporter’s bank Importer’s bank
(Advising bank) (Issuing bank)
(5) (3) (1) (7) (8)
Contract
Exporter Importer
(4)
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Types of L/C
❖ Deferred L/C
❖ As an irrevocable L/C, the issuing bank commits to the exporter to
pay gradually for the full amount of the L/C within the time limit
specified in the L/C.
❖ A deferred letter of credit usually makes periodic payments (interest
payments) and payments in installments.
❖ The deferred payment letter of credit is suitable for purchase and
sale of goods on installments, purchase and sale of equipment in
installments and financing by the exporter.
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Types of L/C
❖ Back to back L/C
▪ Back-to-back L/C is a type of L/C based on a L/C with a larger
value and time allowed to take effect.
▪ Back-to-back L/C is often used for re-export sales to reduce
costs and mobilized capital of traders.
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Back-to-back L/C
Issuing (2) Bank of (5)
Advising
Bank re- bank
exporter
(3) (4) (6)
(1)
(8)
(9)
Importer Re- Exporter
exporter
(7)
Master-Baby L/C
Delivery of raw materials - Receive finished products
2
Master L/C at sight
Outsourcee’ Bank Outsourcer’
5
Bank
Baby deferred L/C
6 1
3 4
(7)
Outsourcee Outsourcer
8
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Master-Baby L/C
Purchase raw materials - Sell finished products
6
Master L/C at sight
Outsourcee’ Bank Outsourcer’
2
Bank
Baby L/C at sight
3 5
7 1
(4)
Outsourcer
Outsourcee
8
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Reciprocal L/C
2’
A’s Bank B’s Bank
2
1’
3’ 1
3
4’-y
A B
4 -x
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LOGO
END OF CHAPTER 3
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