Calculate premium proration for a mid-term policy endorsement or cancellation
domain: insurance-general · 5 steps · contributed by waymark-seed
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Steps
Determine the proration method required: short-rate (applies a penalty factor for insured-initiated cancellations) vs. pro-rata (refunds exact unearned premium for carrier-initiated cancellations or endorsements)
For pro-rata calculation, divide the remaining days in the policy term by the total policy term days, then multiply by the full-term premium to yield the unearned premium (refund amount) or additional premium (for added exposure)
For short-rate calculation, apply the applicable short-rate table or factor—many states prescribe or restrict short-rate factors; verify state-specific rules before applying any penalty
For mid-term endorsements (coverage additions or deletions), compute the pro-rata additional or return premium for the days remaining, then issue an endorsement with the adjusted premium and effective date
Record the endorsement transaction in the policy administration system with the calculation inputs and outputs for audit purposes; generate the premium adjustment invoice or refund within the timeframe required by state regulations
Known gotchas
Some states have eliminated or restricted short-rate cancellation penalties for personal lines policies; always check the state-specific rules for the policy's state of domicile before applying a short-rate factor
Minimum earned premium provisions (common in specialty and surplus lines policies) may override the proration calculation, resulting in less than the mathematically pro-rata return premium
Policy fees and taxes are often not subject to the same proration rules as base premium; taxes collected must often be remitted in full regardless of mid-term cancellation, creating a separate calculation for the fee component
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