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Car insurance buyers' guide: No claims bonus explained

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model car with pound coins spilling outWhat is no claims bonus/no claims discount?

No claims bonus (NCB) is crucial to reducing car insurance premiums. Its worth varies from company to company. A NCB of five years or more, for example, can entitle drivers to a 60%-75% discount on car insurance premiums.

NCB is earned. Generally, for every year that a driver has insurance on a car without making a claim, they will earn another year's NCB to a maximum of 5 years. Some companies offer further discounts for 6-8 years of claims-free driving, but generally the maximum figure is 5 years.

With two cars, a driver will need two lots of NCB - one lot for each car. Drivers can't share a NCB earned on one car between two cars.

If a car gets stolen, why is NCB lost?

First thing to note is that it is a no claims bonus, not a no fault bonus. There is a difference. Whether the car is stolen or, for example, a driver skids on black ice and damages the car, if they make a claim and the insurer is unable to recover the costs from someone else, they will lose some or all of their no claims bonus.

If a driver has an accident, unless the insurance provider can claim all their outlay from someone else on their behalf covering the cost of fixing their car, perhaps getting a hire car to replace it, medical bills etc. - then some or all of the bonus will be lost.

If the insurance providers cannot agree who was at fault for the accident, forcing them to split the cost of their respective outlays, the insured will lose some or all of their bonus as well - no matter who was actually to blame for the accident!

So, if a claim is made and no-one else admits complete fault, and that includes their insurance provider, a driver can expect to lose some or all of their bonus. It's harsh but true, and it's one of the main reasons that insurers urge drivers never to accept responsibility for an accident, or they'll end up paying out for both the repairs of the insured and that of the other party - if the cover is comprehensive that is all to the detriment of the NCB.

Despite this, there is some good news on the horizon. If a driver has the maximum number of NCB years allowed, and it is their first accident, some insurers may not take away all the discount. Instead, they may 'step it back' and reduce the NCB from 5 years to 2 years. So it is worth checking with the insurer to find out their policy on NCB before buying cover with that company.

What happens if a driver has an accident and needs to reinsure their car before a judgement has been made on who was at fault?

Sometimes, if a claim is made, and the details aren't finalised before the renewal premium is calculated, the driver will receive a renewal price based on a lower NCBs that may only be a temporary state of affairs.

So, when a driver gets a renewal price through they need to check on the status of the claim and the likely status of the bonus after the claim to make a judgement about whether to shop around on a reduced bonus or not.

Remember, if the bonus is subsequently restored the driver will get a lower premium and a potential refund, but he or she may well have to stump up a higher payment initially until the claim is sorted out.

If the bonus is protected (see below) this won't be a problem, so it is certainly worth considering!

What can people do to prevent loss of NCB?

Drivers can pay to protect it. This ensures that if they have an accident the NCB remains intact. However, if they have another accident in quick succession they'll find that they're unlikely to be able to protect it again immediately.

So, does a protected NCB prevent the insurance premium from rising?

The short answer, no - it doesn't necessarily stop the premium going up the next year.

So how come, if a claim has been made and the NCB is protected, the premium still rises?

Generally most insurers use drivers claims history as part of the underwriting process - the process that they go through to calculate the premium. The fact that a claim has been made figures in this calculation. With some of the more sophisticated companies the cost of the claim, the fault and non-fault aspect and the type of claim are all taken into account when calculating the premium and that's why they are included in the questions drivers have to complete when getting a quote! That can add a 'loading' to the premium, which may or may not be counteracted by all the other discounts and loadings that apply at the time the renewal price is calculated.

So, is protection worth it?

In a nutshell, yes. Even if the premium goes up - because the person would now have a different claims history than they had at the start of the year - their NCB is still a very valuable asset, an important discount on the car insurance premium. Some companies even offer guaranteed bonus - but you pay a price for that, and it is just another factor to consider when shopping around for car insurance this year.

To understand this in more detail we need to look at how insurance premiums are calculated. Be warned though, it's complicated!

How a NCB affects insurance premiums

Most insurance companies have upwards of 25 questions that they ask drivers to complete when applying for insurance. These are used to calculate the premium.

The answer to these questions - individually and/or in combination - determine the base premium for, say, comprehensive insurance. So, how does this actually work?

People assume that a 5 years NCB is worth a 60% discount, and that the 60% is applied to the price that the insurance company calculates based on the information that has been provided.

Wrong! With nearly all companies the 60% discount is applied during the calculation, and not at the end. Depending on the company and the way they underwrite, the point at which the 60% discount is applied varies. Often it is applied in the middle of the calculation taking in to account a series of loadings and discounts based on the details submitted. And here is where it gets really confusing:

Every company has a unique way of underwriting, based on years of statistical analysis of claims. The formulae they use are highly complex, as they need to strike a fine balance which enables them to get the best possible premium for a certain type of risk at a rate that is as competitive as they want to be in the market.

If they charge too little they'll lose money. If they charge too much they won't be competitive enough to attract or hold customers. So, it's a precise balancing act. And, as a result, the end figure tends to bear little relation to that which people would expect if the insurer had just taken the full premium and then taken off 60%. So, it seems there is no single easy answer to the question 'how does NCB affect the insurance premium!'

What if I don't have any bonus yet (or it has been reduced)?

There is hope. Some companies offer a range of discounts, although many don't offer them on the internet, so once drivers have found cheap insurance through search services, such as, it is worth calling some of the cheaper companies to see if further reductions can be obtained.

For example...

Some companies offer accelerated policies where drivers can earn bonus in 10 months rather than 12.

If a car is already insured and there is a necessity for a second, then many companies will give an introductory bonus if the other car is insured with them also.

If the insured has been driving a company car, some companies will recognise that as NCB if they can prove they have been claim-free in the company car.

Similarly,  if an individual has been a named driver (insurance companies look particularly favourably on spouses in this situation) for a number of years and then gets a policy in their own name, some companies will offer an introductory bonus.

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