Pro-rata and short-rate insurance cancellations

Early cancellation and pro-rata vs. short-rate refunds

When you buy a home or car insurance policy, it usually has a one-year term.

Insurance premiums are pre-paid; whether you pay monthly or annually, you’re paying for future coverage. At the time you make your payment, it’s called unearned premium. As time passes and your policy term runs out, your insurance provider earns the prepayment, converting it into earned premium.

If you cancel your insurance policy before the policy term ends, you’ll usually get a refund. But you probably won’t get a full refund. Instead, your refund will be calculated based on two factors:

1. How much of the policy term has passed?
2. Is there a cancellation penalty?

Part one is straightforward. If your policy has a one-year term and you cancel after six months, you might expect a refund of all unearned premiums — in this case, 50%. That would be a pro-rata refund. A pro-rata (or prorated) refund is based solely on the remaining policy term.

The next part is where it can get complicated.

Many home insurance policies impose a penalty for cancelling early. This is called a short-rate refund. Depending on the provider and policy, the penalty might be a set percentage, or one that scales based on the remaining term. For example, the short-rate penalty could be 5% with 12 months remaining but only 0.5% with one month remaining.

No matter which method your insurance provider uses, the cancellation terms will be spelled out in your policy documentation.

Minimum retained premiums

Even when your provider offers pro-rata refunds, you may encounter the minimum retained premium (MRP), also known as the minimum earned premium.

Basically, this is the premium that the insurer earns simply by issuing the policy. It represents the costs incurred for writing a policy, like data retrieval fees or employee salaries. For example, home insurance policies from Square One feature a $50 MRP.

After you’ve paid at least that much in premiums, you’ll receive a refund of all unearned premiums if you cancel. The MRP only applies if you cancel before you’ve paid at least the minimum amount. In that case, your refund will simply have the MRP deducted.

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When insurers use pro-rata or short-rate refunds

Every insurer is different with regards to their cancellation policies. Even different types of insurance from the same provider may have different cancellation terms.

Generally, you’re most likely to receive a pro-rata refund:

• If you cancel your policy on your renewal date (you may receive no refund, but you won’t pay a penalty)
• If your insurer cancels your policy

And you are most likely to receive a short-rate refund:

• If you cancel your policy in the middle of the policy term

Short-rate cancellation penalties are permitted in every province for both home and car insurance. They’re standard practice for almost all providers. Even the public insurers in BC, Saskatchewan, and Manitoba charge either cancellation fees or short-rate penalties in many situations.

There are some situations, like insurer-initiated cancellations, in which short-rate penalties aren’t allowed. Sometimes, insurers are willing to waive cancellation penalties, such as when someone cancels their policy because they’ve sold their car or house, or if they’re moving to a new province or country.

Square One doesn’t charge a short-rate penalty for any cancellations, whether home or car insurance. However, a minimum retained premium of $50 does apply to most policies in their first year.

Commonly asked questions

Can I avoid paying a short-rate cancellation fee if I switch insurers?

Most of the time, if your insurer charges a short-rate fee for cancelling your policy, there’s no way around it. The only way to avoid it would be to wait and cancel your policy on the renewal date at the end of the term.

However, some providers will waive the fee under reasonable circumstances. For example, if you’ve sold your car and don’t plan to replace it, or if you’re facing unusual financial hardship. If you’re moving to another province, your insurer might offer you better refund terms if you buy another policy from them in the new province.

How much is a short-rate cancellation fee?

Each provider sets their own short-rate cancellation fees, but they usually fall somewhere between 1% and 10% for home and car insurance. Many providers have scaling short-rate tables that reduce the penalty as the policy term passes. Others simply charge a flat cancellation fee regardless of the remaining term.

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