Which cancellation type calculates earned premium only for the period coverage was provided and refunds the unearned premium?

Which cancellation type calculates earned premium only for the period coverage was provided and refunds the unearned premium?

• A. Pro Rata Cancellation
• B. Cancellation
• C. Nonrenewal
• D. Territory

Answer: (A)

Understanding earned versus unearned premium is essential. When a policy is canceled mid-term, the earned premium is the portion that covers the time the policy was actually in force, and the unearned premium is the unused portion to be refunded. Pro rata cancellation uses a simple time-based calculation: it keeps the earned portion proportional to the number of days the policy was in effect and refunds the rest. There’s no penalty or extra charge with this method, so the refund equals the unused time. Other cancellation methods either apply a short‑rate penalty that keeps more premium, or deal with nonrenewal or territory in ways that don’t describe this proportional time-based refund.

Understanding earned versus unearned premium is essential. When a policy is canceled mid-term, the earned premium is the portion that covers the time the policy was actually in force, and the unearned premium is the unused portion to be refunded. Pro rata cancellation uses a simple time-based calculation: it keeps the earned portion proportional to the number of days the policy was in effect and refunds the rest. There’s no penalty or extra charge with this method, so the refund equals the unused time. Other cancellation methods either apply a short‑rate penalty that keeps more premium, or deal with nonrenewal or territory in ways that don’t describe this proportional time-based refund.