It seems to me that there is some major confusion over the different options to cancel a reservation.
I have had a few guests cancel and it never comes through to myself to agree to the cancellation.
For a host to cancel, there are a 5 options
My place is unavailable
I'm looking for a different price or trip length
I'm uncomfortable with the reservation or the guest has broken my house rules
My guest needs to cancel
Other
Option 1 and 2 would mean the host is charged for the cancellation and it will go against the host.
Option 3 - for instant book reservations, the host is not penalised at all. For normal reservations, I do not know about penalties.
Option 4 - I would assume that a message is sent to the guest for the guest to confirm that they want to cancel. The reservations cancellation policy would come into effect for the guest when using this option.
Option 5 - Never used but I would assume this is the one that goes to Airbnb Customer Services to consider based on the information provided.
As for the guest, I would expect them to have similar options. So if the guest selects the option that the host needs to cancel then you would get a message to confirm or decline that you need to cancel. If you confirm this then host cancellation penalties would come into practice. So make sure you reply and decline the cancellation. It is the guest that needs to select the correct option, or you could start the cancellation by using the guest needs to cancel option.
Remember that as a host, we don't want to be penalised for cancelling, but as a guest, they also do not want to be penalised.
If the guest checks in, and later decides they do not want to stay or they want to shorten their stay, personally I use the option to amend the reservation, changing the dates and sometimes, and sometimes not, I will give a part or full refund, but it allows you the option of how much to refund when amending a booking.
It seems like either the correct options are not being selected or/and hosts are not reading and replying to requests within the given 24hr period.