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
Same as term : Self Insurance: protecting against loss by setting aside one's own money. This can be done on a mathematical basis by establishing a separate fund into which funds are ...
a large number of homogeneous exposures (in order for the deviation of actual losses from expected losses to approach zero, and thecreditability of the prediction to approach one). loss ...
Property coverage for damage or destruction of structures in the course of construction. For example, the standing frame of a house destroyed by fire would be covered. ...
Arrangement under which employees may choose their own employee benefit structure. For example, one employee may wish to emphasize health care and thus would select a more comprehensive ...
one in which the amount and frequency of payment may fluctuate. ...
Trade group of independent claims adjusters who settle claims for insurance companies on a fee basis. Some insurers use their own staff adjusters to settle a claim. Others use an ...
Entitlement of a participant in an employee benefit insurance plan to receive benefits regardless of his or her employment status. ...
Date at which insurance protection begins. ...
Statutory surplus plus the interest maintenance RESERVE plus the ASSET VALUATION RESERVE. ...
Have a question or comment?
We're here to help.