Credits from Policy Transactions and Billing Changes
Overview
There are cases where a transaction results in a net credit for the insured, rather than the typical case where coverage is added and a debit results. For example:
Policy cancellations
Removing a coverage or exposure
Choosing coverage terms which result in a premium rate reduction
A change in risk profile resulting in lower premium rates
In each of these cases, the total premium and other charges for the policy will decline, resulting in a net credit for that transaction.
Also, sometimes a billing change will result in a shift in the profile of installments such that there is less due in the short term and more due in the longer term, effectively generating a short term credit. This could happen by shifting from a full-pay plan to a a monthly installment plan .
You can choose to leave some or all of the surplus credit amount in the account’s credit balance, and/or create a disbursement to return excess to the insured.
Example 1: Standard Cancellation
In a simple case, consider a year-long policy billed on a full-pay basis, with premium of $1200 per year. If this policy is cancelled after the initial installment is paid, the situation will look like this:
Invoice 1: $1200 (paid)
Invoice 2: -$600
The net-credit invoice is settled automatically and then we have a $600 credit in the insureds’ credit balance. This amount could be disbursed to the insured or applied against other policies on the account, if there are any.
Example 2: Lapse
Consider the case where there is:
A $1200 annual policy paid at $100/month
The first two invoices are paid normally ($100 each)
The third invoice becomes past due
The fourth is generated and remains unpaid
The policy lapses and is cancelled halfway through the fourth billing cycle, 3 1/2 months into the coverage period
In this case, a cancellation transaction is generated for reversal of 8 1/2 months’ worth of premium, or an $850 credit. Unlike in the full-pay case, this amount is spread out over installments to align with the original, positive amounts.
This cancellation will be spread across the installment periods after the cancellation effective time, so $-50 for the fourth installment, and $-100 for the remaining 8 installments. This means that the fifth through twelfth invoices are each for $100 + $-100, or net zero. The only non-zero invoices remaining are the 3rd and 4th (from before, $100 each), and the portion of the cancellation invoice for the 4th installment, $-50. So in all we have:
Invoice 3: $100
Invoice 4: $100
Invoice 4 Cancellation: $-50
Invoice 5 onward: net zero
The cancellation invoice is settled immediatly and the $50 is applied to the credit balance. This amount can then be applied to either (or both) of the other outstanding invoices, and the net that the insured still owes is $150.