What type of premium refund method is required when an insurer cancels a policy?

The correct premium refund method required when an insurer cancels a policy is the pro-rata method. This method ensures that the insured receives a premium refund that fairly reflects the time the policy was in force. With a pro-rata refund, the insurer calculates the premium for the time the policy was active and gives back the remaining balance for the unused portion of the policy term. This method is equitable because it considers the complete duration of coverage received, allowing policyholders to avoid financial loss for coverage they did not use.

In contrast, the flat rate method does not take into account the time period for which coverage was provided and can lead to inconsistencies in refund amounts. Short-rate refunds involve penalties and are typically applied when the insured cancels the policy early, which is not the standard procedure when an insurer cancels a policy. The full refund method suggests that the entire premium is returned, which is not standard practice when considering partial periods of coverage. Therefore, the pro-rata method aligns with the principle of fairness and is the most commonly accepted practice in the insurance industry when dealing with cancellations initiated by the insurer.