Short rate cancellation

Short rate cancellation
See also

Short-rate cancellation appears when an insurance policy is cancelled at the request of the insured prior to the expiration date. The insurance company may claim a penalty for such action, as long as it is stated in the policy agreement. Usually, such penalty is calculated by returning only 90% of the pro-rata cancellation amount. It may be also included as a part of the policy. A simple example shows the standard calculation method. Suppose you have a house policy with $500 annual premium and after 150 days into the policy it is cancelled short-rate. Return premium would be calculated as: 365 days - 150 days in force = 215 days remaining, what gives: 215/365 X $500 = $294.52 X 0.90 = $265.07[1] Short-rate cancellation is used by company to offset some of the cost associated with setting up the policy. There are few cancellation methods taht are in common use:

  • Pro rata - method without penalty for short cancellation
  • Short-rate
  • Short period Rate (90% pro rata) - the penalty is 10% of the unearned premium

Pro-rata cancellation[edit]

Pro-rata calculation method is used when an insurance policy is cancelled and the return premium is calculated "pro rata temporis" (from latin - accordance with the time) by dividing the number of days remaining in the policy term by the total days of the policy period[2].

Short rate table[edit]

Short rate table is a table used for calculation of the return premium for a policy resolved prior to the expiration date by the insured. It is represented as a table conatining all days form the insurance period with the corresponding percentage of the premium that has to be paid by insured. Ratio of th percentage to period is decreasing untill one year where it equal one. For the loger periods of the policy than one year, the artes are starting to be more bargain [3]. Below is an example of the abridged version of the short-rate table. A full table would contain a rate for every day of the whole year.

Table 1 Short-Rate Fire Insurance Table for One Year[4].
Days in Force Percentage of Basic Rate Days in Force Percentage of Basic Rate
5 8% 75 31%
10 10% 80 32%
15 13% 85 34%
20 15% 90 (3 months) 35%
25 17% 120 (4 months) 44%
30 (1 month) 19% 150 (5 months) 52%
35 20% 180 (6 months) 60%
40 21% 210 (7 months) 67%
45 23% 240 (8 months) 74%
50 24% 270 (9 months) 80%
55 26% 300 (10 months) 87%
60 (2 months) 27% 330 (11 months) 94%
65 (2 months) 28% 360 (12 months) 100%
70 30

Cancellation by the insurer[edit]

In the scenario when the cancellation is requested by the insurance company, the-short rate cancellation procedure does not apply. Then, there is an opposite situation and it is the insurer who will have to pay off the accrued amount to the insured subject. The total premium is prorated (divided equally) over the entire insurance period[5].

Footnotes[edit]

  1. Silver L. and others 2010, page 140
  2. Outreville J. F., 1998, page 234
  3. Kaliski B. S. 2014, page 117
  4. Kaliski B. S. 2014, page 117
  5. Sentlowitz M. 2014, page 293

References[edit]

Author: Arkadiusz Liszka