Short Rate

When the policy holder cancels a policy before the expiry date then the insurance company is entitled to calculate the resulting refund on a short rate basis. This is like applying a penalty as the net result is less then the proportionate part of the policy that is left.

An example is that if you cancel a $1200 policy one month into the term you would expect to only be charge $100 of the total premium. This would be a flat rate. The short rate is a percentage of the premium which could be 10% if canceling within 31 days = $120 charged for time on risk. There can be much higher penalties on cancellations as some insurers have minimum retained premiums.

Be careful if you are re-writing a policy mid term. You can be charged a short rate and the penalty can be significant.