The difference between pro-rata and short-rate cancellations, who pays a penalty and when, and how minimum earned premium changes the math.
When a policy ends early, the insured gets back the premium for the unused part of the term. How much depends on the cancellation method.
Pro-rata returns exactly the unused share: cancel halfway through an annual policy and you get half the premium back.
Short-rate returns less than pro-rata. The carrier keeps an extra amount to cover the up-front costs of writing a policy that did not run its full term.
When the carrier cancels — for non-payment, underwriting reasons or non-renewal — the return is almost always pro-rata. When the insured asks to cancel, the policy may allow short-rate.
Many policies apply a flat penalty, commonly 10% of the pro-rata return. Older forms use a short-rate table that sets the earned percentage by days in force.
Specialty and E&S policies often include a minimum earned premium, typically 25% to 35%. The carrier keeps the greater of the pro-rata earned premium and the MEP, so a policy cancelled in its first weeks may return far less than expected.
Policy fees and inspection fees are usually fully earned at inception. Taxes follow the premium they were charged on.