P&CNationalmedium
A commercial insured paid the full annual premium of $4,800 and voluntarily cancels the policy 90 days into the term. The carrier applies a short-rate cancellation. Compared to a pro-rata refund, the short-rate refund will be:
AEqual to the pro-rata refund, since both methods always return the very same unearned premium amount
Smaller than the pro-rata refund, because a short-rate penalty is retained
CLarger than the pro-rata refund, because the carrier credits additional unearned premium
DZero in all cases, because voluntary mid-term cancellation forfeits any unearned premium
Why this is the answer
When the insured initiates cancellation mid-term, carriers traditionally apply 'short-rate' refunds: the unearned premium is refunded minus a penalty (often via a short-rate table) to compensate the insurer for acquisition cost recovery. When the insurer initiates cancellation, pro-rata applies — refund equals the exact unearned proportion with no penalty. The short-rate refund is therefore always smaller than the equivalent pro-rata refund.
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