Short Rate vs Pro Rata Cancellation
Updated
When a policy ends before its expiration date, the customer gets back part of the premium they paid. Pro rata and short rate are the two ways that refund is worked out.
Pro rata: the full unused share
Pro rata cancellation returns the full share of premium for the time left on the policy, with no penalty. [1]
To find it, work out what part of the term is left and multiply it by the premium.
Refund = premium × (days left ÷ days in the term)
Example. A customer pays $1,200 for a 12 month policy. It cancels after 3 months, so 9 of 12 months are left. The refund is $1,200 × 9 ÷ 12 = $900. The carrier keeps $300, the premium for the 3 months the policy was in force.
Short rate: the refund minus a penalty
Short rate cancellation lets the insurer keep more of the unused premium than pro rata would. It is meant to discourage the customer from cancelling early, and it applies only when the customer asks to cancel. [2]
How the penalty is worked out depends on the policy. Some policies include a short rate table. Others raise the pro rata figure by a set percentage, for example 10 percent. [2]
Example, using a 10% increase on the share the carrier keeps. The same $1,200 policy cancels after 3 months at the customer's request. Pro rata, the carrier would keep $300. With a 10% increase on that, it keeps $300 × 1.10 = $330, and the refund is $1,200 − $330 = $870. The customer gets $30 less than with pro rata.
Your policy decides the real method. If it includes a short rate table, that table sets the number, not this example.
Who decides which one applies
| Who ends the policy | Usual method |
|---|---|
| The customer asks to cancel | Short rate may apply, if the policy allows it [2] |
| The carrier cancels | Pro rata (short rate applies only when the insured cancels) [2] |
Check the policy wording for the exact rule. Some policies and some states set their own terms.
Why it matters to your agency
When a policy cancels, the carrier often takes back the commission it paid on the unused premium. That is a chargeback, and it usually follows the same share as the refund.
Example. Your agency earned 10% on the $1,200 policy, which is $120. After a pro rata cancel with $900 refunded, the carrier takes back 10% of $900, which is $90. Your agency keeps $30.
That chargeback can then flow to the producer who sold it, if their plan passes chargebacks on. Knowing the refund method helps you explain to the producer why their pay went down, and by how much.
How to use this with customers
When a customer asks what they will get back, tell them which method their policy uses, then run the numbers with the days left. Show the pro rata amount first, then the penalty, so they can see where the difference comes from.
How Agency Edge handles it
Agency Edge records each chargeback in full or prorated, as your pay settings say, and you choose how much to take back when you run Pay Team. It only takes back money on sales it paid. See Record a chargeback.
Sources, read October 16, 2026
- IRMI, "pro rata cancellation" — https://www.irmi.com/term/insurance-definitions/pro-rata-cancellation
- IRMI, "short-rate cancellation" — https://www.irmi.com/term/insurance-definitions/short-rate-cancellation
Track chargebacks without a spreadsheet
Every chargeback, in full or prorated, on the paycheck it comes off.