Registered Insurance Brokers of Ontario (RIBO) Practice Exam

What type of refund is provided when an insured cancels a policy mid-term?

1. A full prorated refund

2. A short rate refund

3. No refund available

4. A partial refund based on usage

The correct answer is: A short rate refund

When an insured cancels a policy mid-term, they typically receive what's known as a short rate refund. This type of refund is a partial reimbursement that takes into account that the insured did not fulfill the entire term of the policy. The reason it's termed "short rate" is that it generally involves a penalty or a deduction from the total premium amount, reflecting the administration costs incurred by the insurer in processing the cancellation and any associated risk. In contrast, a full prorated refund would return the exact proportion of the premium for the unused portion of the policy without any deductions, which is less common in cases of mid-term cancellations. No refund available is not a standard practice, as most insurers do offer some form of refund upon cancellation. Similarly, a partial refund based on usage may apply to specific situations, such as usage-based insurance, but it is not standard for all policies in general practice. Understanding these distinctions is essential for providing accurate information to clients regarding their options if they consider canceling their insurance coverage before the policy's term is complete.