Polysea

Pro-Rata Premium Calculator

Calculate prorated insurance premium refunds for both pro-rata and short-rate cancellations. Free, instant, and no sign-up required.

Cancellation Type

What is Pro-Rata Premium?

A pro-rata premium is the proportional share of an insurance premium that corresponds to the exact number of days a policy was in force. When an insurance policy is cancelled before its expiration date, the insurer calculates how much of the total premium was "earned" (covering the period the policy was active) and how much was "unearned" (covering the unused portion). The unearned premium is then returned to the policyholder as a refund. This method ensures that the insured only pays for the coverage they actually received.

Pro-Rata vs Short-Rate Cancellation

There are two primary methods insurers use to calculate a premium refund when a policy is cancelled mid-term:

Pro-Rata Cancellation

The insurer refunds the full unearned portion of the premium with no penalty. This method is typically used when the insurer initiates the cancellation, or when specific policy terms guarantee a pro-rata refund. The policyholder receives a fair, proportional refund for every unused day.

Short-Rate Cancellation

A penalty percentage is deducted from the unearned premium before the refund is issued. This method is commonly applied when the policyholder requests the cancellation. The penalty covers the insurer's administrative and underwriting costs. A typical short-rate penalty ranges from 5% to 10%.

How to Calculate Pro-Rata Premium

Follow these steps to calculate the pro-rata premium refund for any insurance policy:

  1. Determine the daily rate — divide the annual premium by the total number of days in the policy term.
  2. Count the days used — calculate the number of days from the policy start date to the cancellation date.
  3. Calculate the earned premium — multiply the daily rate by the number of days used.
  4. Calculate the unearned premium — subtract the earned premium from the annual premium.
  5. Apply penalty if short-rate — for short-rate cancellations, multiply the unearned premium by (1 - penalty percentage) to get the final refund.

Worked Example

Suppose a commercial property policy has a $12,000 annual premium, starts on January 1 and ends on December 31 (365 days). The policy is cancelled on July 1 (181 days used).

Daily Rate      = $12,000 / 365 = $32.88

Earned Premium  = $32.88 x 181 = $5,950.68

Unearned Premium = $12,000 - $5,950.68 = $6,049.32

Pro-Rata Refund  = $6,049.32

Short-Rate Refund = $6,049.32 x (1 - 0.10) = $5,444.39

Frequently Asked Questions

What is pro-rata cancellation in insurance?

Pro-rata cancellation is a method where the insurer refunds the exact unearned portion of the premium based on the number of days remaining on the policy. There is no penalty applied, so the policyholder receives a full proportional refund for the unused coverage period.

What is the difference between pro-rata and short-rate cancellation?

Pro-rata cancellation refunds the full unearned premium with no penalty. Short-rate cancellation applies a percentage penalty (typically 10%) to the unearned premium to cover the insurer's administrative costs, resulting in a smaller refund for the policyholder.

How do you calculate the daily rate for an insurance premium?

The daily rate is calculated by dividing the annual premium by the total number of days in the policy period. For example, a $3,650 annual premium on a 365-day policy gives a daily rate of $10.00 per day.

When is a short-rate cancellation typically used?

Short-rate cancellation is typically used when the policyholder initiates the cancellation, as opposed to the insurer. The penalty compensates the insurer for underwriting and administrative expenses incurred when issuing the policy.

Can I get a full refund if I cancel my insurance policy?

A full refund is generally only available during a free-look period, which is usually the first 10 to 30 days after the policy is issued. After that, the refund is calculated on a pro-rata or short-rate basis depending on who initiates the cancellation and the terms of the policy.

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