Pro Rata Rate
Definition of "Pro Rata Rate"
The term pro rata comes from Latin and translates to in proportion, proportionally, the proportion of, proportionately determined, or according to a specific rate. It is often used in legal and economic texts or contexts to express a just distribution of an allocation. Pro rata generally refers to shares of a whole that is split in various ways, like a year is divided into 12 months or 365 days, a cost is divided in two ways that correspond in value to the profit, an asset is split into two, corresponding with the investment of each party.
The reason for which we discuss pro rata in the insurance world is because there are many pro rata elements in the field. The term weighs heavily on proportionate distributions of gains, liabilities, premiums, and payments, and the insurance industry deals with all of these. Pro rata clauses deal with spitting the coverage. In contrast, pro rata cancellations cover policies terminated during their coverage.
Pro rata rates are ways through which an insurance company can determine monthly payments or additional payments to an existing policy. We’ll see how just below.
Where is Pro Rata Rate Used?
Usually, insurance policies have a timeline of 12 months, a full year. There are, however, several types of insurances that have policies running for a few days, a few weeks, or a few months. Not all types of insurances are limited to the 1-year timeline. Look at travel insurance, car insurance, or health insurance as their coverage can be for less than a year.
In those instances, the insurance company has to establish an amount for the insurance premium. So, if an annual premium costs $1,000, but the driver loans the car and only uses it for two and a half months, he can sign a policy for that period alone. The insurance company needs to calculate the pro rata of the premium for that period. The pro rata rate, in this case, would be:
Pro Rata Rate = daily premium X days
Pro Rata Rate = ($1,000(annual premium)/365) x 76 (two and a half months)
Pro Rata Rate = $208 approximately
Another situation in which these pro rata rates help insurance companies to carefully calculate the exact premium required for a policy is when the policy changes. So, if John has a $1,000 annual premium for his car, but sometimes during that period, he decides to add another car to the policy from August 24th. In this situation, the start date, end date, and the date when the policy changes are required for a correct calculation. The pro rata rate, in this case, would be:
Pro Rata Rate = daily premium X days
Pro Rata Rate = ($1,000/365) X 130
Pro Rata Rate = $356 approximately
The figures are usually rounded up.
Popular Insurance Terms
Number of times losses occur, and their severity. These statistics measure expectation of loss, and are critical in establishing a basic premium or the pure cost of protection that is based ...
Organization that is part of a preferred provider organization (PPO) in which enrollees select an EPO provider to act as their primary care physician and serve as the gatekeeper. This ...
Same as term Contribution: principle of equity in property, casualty, and health insurance. When two or more policies apply to the loss, each policy pays its part of the loss, unless its ...
Group coverage for members of a fraternal association, usually on a nonprofit basis. ...
System of charges to an insured that fluctuates according to the loss experience of that insured. This is a form of experience rating. ...
Correction of a contract containing a mistake in order to prevent a party to that contract from gaining from that mistake. For example, if $1,000,000, instead of the correct amount of ...
Statute that makes it illegal in most states for an agent to rebate (return) any portion of his commission as an inducement for an applicant to purchase insurance from him. ...
Total amount of commissions and expense allowances paid by the reinsurer to its ceding company minus the total amount of reinsurance commissions and expense allowances that, in turn, its ...
Commission that is paid based on how profitable a particular type of business proves to be that is written by an agent. ...
Have a question or comment?
We're here to help.