Property and Casualty Insurance Practice Exam

What is the main characteristic of a pro-rata basis of cancellation?

1. The insurer retains earned premium and allows no additional fees

2. The insurer refunds all premiums paid

3. The insurer keeps a portion for expenses regardless of time elapsed

4. The policy is automatically renewed without conditions

The correct answer is: The insurer retains earned premium and allows no additional fees

The main characteristic of a pro-rata basis of cancellation is that the insurer retains earned premium and allows no additional fees. This means that if a policy is canceled on a pro-rata basis, the premium is refunded to the insured for the unearned portion of the policy, calculated based on the time the policy was in force. This allows the insured to receive an accurate refund that corresponds to the actual time the coverage was provided, without any penalties or additional cancellation fees. In the context of property and casualty insurance, this method is common because it ensures fairness to both the insurer and the insured. The insurer keeps the premium for the time that the coverage was active while returning the remaining unearned premium. This approach contrasts with other cancellation methods where penalties are applied or a pro-rata calculation might not necessarily occur.