What is the 25% earned premium?

Question

How do insurance companies Pro-Rate policies? How do they calculate the 25% minimum eared on commercial policies. Why do they say they retain the minimum earned within the 3 months?

Answer 1

If you have a quote for $1,000 for the year, even if you cancel the policy after two days, it's going to cost you $250.  THat's the 25% minimum earned.  

If you cancel your policy after three months, it's a regular short rate cancellation (not pro rata, as you suggest).  

Why do they do it?  Unethical business owners who need to get a "certificate of insurance" for a job or contract, will go, buy the policy, get the certificate, then try to cancel the policy the next day.    They don't WANT insurance, they just want someone else to THINK they have insurance.

It's done, because it costs money for an insurance company to issue a policy - and this helps the insurance company not lose money, from "non serious" or short term businesses.

Answer 2

25% Earned premium means, the costs of the Insurance Company (house) Suplus Line Broker (If any,middle man) Insurance  Broker (another middle man) broker fees, taxes and inspections etc. This money is earned by all of these sales reps....

No one works for free. So, if you paid $1000 a year, but you cancel before the renewal, all the fees you were charged (administration) will be kept, the rest would be pro-rated let's say from today until renewal 12/01/08