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Pro Rata Premium
A Pro Rata Premium comes into effect when you first take out an
insurance policy. Insurance premiums are charged on a monthly basis, while
people take out insurance at any time during any given month, and this insurance
takes effect immediately. In such a case, where a client enjoys insurance cover
for only a certain part of the initial month in which the policy comes into
inception, it clearly wouldn't be fair to charge a full month premium. At the
same time the insurance company needs to be compensated for the cover provided.
This is because a fundamental principle of insurance is that in the absence of
the payment of premiums, insurance cover is not active. The reason for this is
obviously that insurers deal primarily in risk and at any point are under some
form of exposure with regard to the possibility of having to pay out on the
insurance policy.
In recognition of this, a client who takes out an insurance policy in the
middle of a month pays a portion of the monthly premium, calculated according to
the percentage of the time during the month for which insurance cover is
provided. This is known as a pro rata premium. By way of illustration,
let's say the total monthly premium is R300 and the client takes out an
insurance policy that takes effect on the 11th day of a 30 day month. The pro
rata premium amount is arrived at by taking premium, dividing it by the number
of days in the month (to get the daily amount payable), and then multiplying
this daily rate by the number of days for which the client will enjoy insurance
cover - in this case, 20 days. This produces a pro rata premium for the month,
which comes to R200. The client is therefore charged this amount and receives
full insurance cover for the 20 days remaining until the end of the month.
In short, a pro rata premium is simply a proportional premium. This is
typically a once-off premium, only covering the unusual initial time period. As
soon as the next month arrives, the client is covered for the full month and
pays the full monthly premium.
Other Articles:
Market Value Calculation No Claim BonusSASRIA - South African Special Risks Insurance AssociationInsurance ExcessKnock For Knock Under Insurance
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| | 4/30/2010 3:36:04 PM |
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