What is pro rata cancellation?

Pro rata cancellation refers specifically to the scenario where an insurance policy is canceled before its expiration date and the insurer returns a portion of the premium based on the time that has elapsed since the policy was in force. In this case, if a policyholder cancels the policy partway through the coverage period, the insurer calculates the unearned premium—reflecting the remaining period of coverage—and issues a refund for that portion. This method is considered fair because it aligns the premium charged with the amount of insurance coverage actually used.

The other options do not accurately describe pro rata cancellation. One option discusses a policy covering risks for a longer period, which is not related to cancellation but rather to the policy’s term. Another option suggests a discount for early renewal, which pertains to promotional pricing rather than the cancellation process. Lastly, a complete forfeiture of the premium upon cancellation contradicts the principle of pro rata cancellation, as it would imply no refund is given, regardless of the cancellation timing, which is not the standard practice for pro rata calculations.