Cancellations

Business overview of cancellations

A cancellation is a policy transaction that ends a policy before its original effective date.

Cancellations can be initiated either by the policyholder or by the insurer. For example, a policyholder can cancel their policy if they decide to work with a different insurer. An insurer can cancel an insured's policy for non-payment. Cancellations initiated by the insurer usually take longer to complete, as there are typically regulations mandating that the insurer inform the policyholder of the intent to cancel a certain amount of time before the policy can be canceled.

When a policy becomes delinquent due to non-payment, the billing system does not directly cancel the policy. Rather, the billing system informs the policy administration system of the non-payment. It is the policy administration system that cancels the policy. The policy administration is also responsible for determining the final amount that must be billed. It sends this information to the billing system. The billing system compares this amount with the amount of money received. The billing system can then bill for a final amount or send a refund.

Cancellations are usually categorized as one of the following types:

• Flat - The entire policy amount is refunded. This is typical when the cancellation is effective before the policy goes into effect.
• Mid-term - A prorated amount is refunded. This is typical when the cancellation is effective after the policy goes into effect and there is no additional cost for the processing of the cancellation.
• Short rate - A prorated amount is refunded minus an amount for processing fees. This is typical when the cancellation is effective after the policy goes into effect and there is an additional cost for the processing of the cancellation.

Cancellations typically include negative charges. These charges correspond to the coverage that would have been provided between the cancellation effective date and the original policy expiration date. Cancellations can also have positive charges, such as a charge for a processing fee. But, the positive charges are typically smaller than the negative charges, and the sum of all charges on a cancellation is typically negative.