short-rate cancellation

Short-rate cancellation refers to a type of insurance policy cancellation that serves as a disincentive for the named insured to cancel the policy before its normal expiration date.

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The only time short-rate cancellation would occur would be when the insured initiates the cancellation prior to the expiration date. With short-rate cancellation, the insurer is entitled to retain a greater percentage of unearned premium than would otherwise apply with pro rata cancellation. The method in which the short-rate cancellation penalty may apply varies with the insurance policy in question. For example, a short-rate table may be included as a part of the policy, or the short-rate penalty may be calculated by multiplying the pro rata cancellation factor by a certain percentage increase—for example, 10 percent.