Considering cancelling your auto insurance? Whether it is because you have found a better rate elsewhere or you are now selling your vehicle, it is important to understand how insurance premiums work. If you do decide to cancel, it is important to understand the penalties or fees involved with cancelling before your renewal date. Let’s dissect what an insurance premium is, the difference between short rate vs. pro rata cancellations, and how to determine if you will qualify for a refund.

Setting up your policy

When you set up an insurance policy, you are entering into a year-long (12 month) contract with your insurer. The insurance company will agree to insure you for the length of the policy term or policy period. In turn, you are agreeing to pay insurance for the duration of the insurance coverage.

Your insurance premium is the price that you have agreed to pay for the insurance policy. Insurance premiums are always calculated as an amount owing for the full year of coverage. You may choose to pay the premium in one full installment. Another option is for your insurance company to finance your premium so you can make monthly payments instead. However, it is important to remember that you are still entering a year-long contract and have agreed to pay for a full year of insurance coverage.

Cancellation of a policy

Pro-rata and short-rate are two different ways of determining the refund amount that an insured party will receive if their insurance policy is cancelled before the expiry date. A policy will state in the Terms and Conditions section which approach applies and in which situation.

A cancellation refund will be provided if you paid your premiums annually in advance. Cancelling monthly policies will require you to pay the fee or penalty.

Pro rata (pro-rated) cancellations

Pro-rated cancellations are applied when the insurer cancels the policy and, in some cases, to an insured initiated cancellation. Insurers usually cancel the policy because of some material change that has occurred. A material change is defined as “a substantial and continuing change to your situation that affects and increases the risk.” In light of these changes, your insurer is uncomfortable staying on the policy. Some examples of material changes could be:

Allowing a newly-licensed driver to operate your vehicle
Using your vehicle for a different purpose, such as delivering parcels or driving to work or school when previously you did not
Altering your vehicle for performance or appearance reasons can push up the price of your insurance premium. These modifications are changes that alter your car from the manufacturer’s standard specifications.

If an insurance policy is cancelled “pro rata”, you only owe the earned premium for the time the policy was in force (there is no short rate cancellation penalty.)

Pro-rated cancellation refund

As mentioned above, you would qualify for a refund if you have paid your premiums in advance. With pro-rated cancellations, you are refunded the total amount of the premium you did not use. For example, if you had five months remaining on your policy, you will be refunded a pro-rated amount for that time.

Another scenario would be if an insured pays a premium of $12,000 for the year but the policy is cancelled after six months on a pro-rata basis, the insurer returns $6000 to the insured; 50% of the policy remaining means 50% of the premium is refunded.

Short rate cancellations

Should you choose to cancel your policy before the contract is up, your insurance company will normally cancel your policy “short rate.” This means that they will release you from your contract, however, they will charge you a short rate cancellation fee or penalty. In other words, the insured receives less of a refund with this calculation. Refunded premiums will vary depending upon how much you paid previously and how long you’ve had your car insurance policy.

From the insurer’s perspective, a short rate cancellation covers the time and effort that went into crafting the policy. Seen as its administration costs, it better balances the money they collect with their chances of paying for a loss.

How are short rate cancellation fees calculated?

If you are breaking the terms of your contract with the insurance company early, you will owe your insurer more than just the earned premium; you will also owe a short-rate cancellation penalty. This amount is calculated using the insurance company’s “short rate cancellation tables”.

Typically, insurance companies will charge a percentage of your total insurance premium for the year, which is higher than the per day amount would be. These fees are generally between 2-8% of your premium. The result? The penalty amount will be higher if your policy is cancelled when the policy is new. If you cancel your policy shortly before the policy expiry date, your penalties will be much less.

FYI: Insurers will calculate your premium refund on a short rate versus a pro rata basis. Insurers use a cancellation calculator or short-rate cancellation table to estimate the costs to cancel. isure’s insurance cancellation calculator will help you gain a better understanding of how much of an insurance premium refund you can expect, but we, of course, always recommend confirming this with your isure broker before cancelling.

Generally, there is almost no way to for you to avoid a short rate cancellation and its associated penalties if you decide to cancel your policy. There are, however, some insurance companies (such as Intact Insurance) that will let you do a pro rata cancellation, even when you opt to cancel.

Notify your isure broker if you want to cancel your policy

With car insurance, many people choose to spread the cost by paying monthly. However, merely cancelling payment through your bank account or credit card doesn’t mean you’ve cancelled your car insurance policy. Inform your isure broker that you want to cancel and get written confirmation from them. What may happen is that your insurer might chase you for unpaid premiums. You also risk having a claim against your credit history, so make sure you are all paid up with your car insurance company when you cancel.

Renewal time is the best time for you to consider cancelling a policy because it is the most likely way for you to avoid potential charges or cancellation fees. Mid-policy cancellations can cost you in fees and other charges. Insurance providers anticipate a full year of payments when providing car insurance to you, and may charge for your change of heart. It’s always important to check the fine print of your policy before you make any final decisions. Talk to one of our isure representatives to find the answers to your policy questions!