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
Minimum of care owed by one party for the physical safety of another. Liability suits are brought because of negligent acts and omissions resulting from failures to exercise due care. ...
Professional designation earned after the successful completion of six national examinations given by the insurance institute of America (IIA). Covers such areas of expertise as ocean ...
Need for an insurance policy to be paid up or to be paid for a minimum number of years before the insured is eligible to receive any benefits. This requirement is typically found in ...
Same as term Deviated Rate: rates used by a property and casualty insurance company that are different from that suggested by a rating bureau. An insurance company may use deviated rates ...
Tort liability, which is defined by law, requiring an injured party to prove only that he or she was harmed in a specified way in order to collect damages. For example, the law provides ...
Liability and physical damage coverage for trailers under business or personal auto policies. Most automobile insurance policies offer liability coverage for common types of trailers owned ...
1945 federal legislation in which the Congress declared that the states may continue to regulate the insurance industry. Nevertheless, in recent years Congress has expanded the federal ...
Futures contracts based on automobile and health reinsurance policies to be traded on the Commodity Future Exchange of the Chicago Board of Trade. The purpose is to allow insurance ...
Policy covering an insured's property at several different locations. This coverage is used by business firms that have several locations and may move property from location to location. ...
Have a question or comment?
We're here to help.