In the insurance industry, pro rata means that claims are only paid in proportion to the insurance interest on the asset; this is also known as the first condition of the average. In insurance, the pro rata is used to determine the amount of the premium due for a policy that only covers a partial term. Allocating the appropriate portion of an annual interest rate to a shorter period of time can also be done on a pro rata basis. Using the pro-rated cancellation method, you calculate the amount of the refund based on the remaining duration of the policy.
This means that the insured only ends up paying for the number of days that the insurance contract is actually in force. The pro-rated method applies when the insurance company initiates the cancellation and, in some cases, when the insured does. Prorated insurance is a type of policy that maintains a standard of payment that the industry considers to be proportionate. It is the estimate based on the amount paid for the insurance of a property, the period covered, or the risk.
This applies to many insurance transactions, such as paying or cancelling insurance. Most insurance policies are based on a 12-month period, so if a policy is needed for a shorter term, the insurance company must pre-rate the annual premium to determine what is due. The pro rata and the short rate are two different ways of determining the amount of reimbursement that an insured party will receive if their insurance policy is canceled before the expiration date.