‘No Claim Bonus’ is a major incentive insurance companies give to vehicle owners to encourage good claims behavior. This incentive accrues over time and rewards owners who haven’t made a claim over consecutive years. But how should customers use this bonus – should they use it too soon or too late? What is the monetary cost associated with your decision? We explore everything about ‘No Claim Bonus’ in this article.
Motor Insurance is one of the most extensively bought insurance in India. Insurance companies service a huge percentage of claims every year. Here's our article which can help in choosing best suitable automobile insurance. Ideally, an insurance company would love to have a customer who pays for insurance but never uses it. From a customer perspective, it is a completely opposite scenario. A customer feels that premium paid is a waste of money each year because (s)he is not getting any benefit from that policy. Insurance companies face a huge loss if such customers drop out of the system and never renew their expired policies. That is why they offer an incentive called ‘No Claim Bonus’
What is a ‘No Claim Bonus’?
‘No Claim Bonus’ is an incentive that an insurance company offers to customers who do not make a claim. Typically, there is no incentive in the first year of car purchase. From second year onwards, a customer starts getting a 20% discount on insurance premium. The percentage of this discount increases each year a customer does not make a claim. So a typical NCB discount starts at 20% and moves up to 50% by year 5, assuming a user never makes a claim in 5 years.
Following info-graphic shows how ‘No Claim Bonus’ works:
Do you get NCB bonus on entire premium?
No. NCB only applies to the ‘own damage’ component of your comprehensive insurance premium. No incentive is offered on the ‘third party liability’ component.
If your insurance premium is Rs 12,000, 20% of which is third-party premium, then you only get NCB discount on INR 9600 (80% of Rs 12,000). So a 25% NCB on your premium will give you a discount of INR 2400 (25% of Rs 9600).
What happens if a customer makes a claim?
That depends on when a customer makes a claim. Typically, when a customer makes her first claim, ‘No Claim Bonus’ from the next year goes to 0%. This means that a customer will forgo the discount not just in the next year but also in all subsequent years thereafter. This could be very costly at times and customers do not realize the impact of filing a claim too early. Let’s look at it by taking an example:
Let’s say Rahul Gupta bought a Maruti Swift VXI version (petrol) in 2016. Let’s assume he chooses a Bajaj Allianz Motor Insurance Policy. Below is a chart showing premium for a Maruti Swift VXI version at various stages of its life cycle assuming two scenarios, scenario 1 is where you get no NCB and scenario 2 is where you get NCB every year up to 5 years.
From the above table, you can see that a car with ‘No Claim Bonus’ is significantly cheaper in years 2,3,4. In this above example, a customer saves a total of 6,434 rupees on a Maruti Swift VXI based on whether (s)he has made a claim in any preceding years or not. There are a few important points a reader would notice from the previous chart:
- NCB has no effect on insurance premium in the first year
- NCB effect is marginal in the second year. Notice that premium drop is steepest in the second year as most car insurance customers win or lose new customers in that year. Every insurance company wants to quote aggressively in the second year of renewal. We explain why this happens in greater detail in our post here
- NCB benefit tapers out and is almost minimal by the fifth year. So customers who haven’t made a claim till the fifth year will get limited rewards thereafter
- Biggest benefits of NCB are obtained in second, third and fourth year of renewal in that order
When should I make a claim?
If a customer makes a claim, the premium for subsequent years is calculated by taking NCB discount as 0. As per the previous table, your lifetime loss on NCB will look something like below table assuming you make a claim at different points of time. Your lifetime loss is highest if you make a claim anytime in the first 2 years. And after the fifth year, lifetime loss in very low if you make a claim on your current car. In this case, it’s a wiser strategy to use this NCB bonus on a new car (yes, you can carry over NCB bonus from your old car to the new. More on that in next section)
So, carefully analyze whether you want to make a claim or pay for that using your own money. A simple rule of thumb is if your Lifetime Loss Value is greater than your current claim by at least 20%, pay for that repair from your pocket. If not, go ahead and use your insurance. You can quickly ask Arvi whether you should make a claim or not & Arvi does all these calculations and makes you a right recommendation.
Is No Claim Bonus tagged to my car?
The simple answer is 'No'. No Claim Bonus is actually tagged to an owner and not to a car. So if you want to change your insurer on the same car or buy a new car, you can transfer the benefits of your existing NCB. Your NCB discount can be applied at the first-year premium of your new car. Note that this only applies if you sell your old car and buy a new one.
This is a powerful incentive as it brings in a lot of discounts to your policy. Let’s look at previous example to see how you can benefit from this. Let us say Rahul bought a new Maruti Sift Dzire VXI by selling his old Maruti Alto that had no claim over 5 years (50% No Claim Bonus). So Rahul would have paid 15,000 as total premium – let us assume that a split of this premium is as follows: Third Party Liability: 3000; Own Damage: 12,000. If Rahul carries over his NCB from previous car, his net premium drops to 9000 (Third Party Liability: 3,000; Own Damage: 50% of 12,000 = 6,000). That is significant savings in the first year.
How can I transfer NCB from an old car to new?
Here are the steps needed to make a transfer:
- If you sell a car, you need to get a photocopy of new owner’s name in the RC book. If you wish to retain your old car, you need to transfer ownership to your spouse or children
- Contact your insurance company with proof of transfer of ownership & obtain your NCB certificate. This certificate is valid for 3 years
- When you buy a new vehicle, submit NCB certificate to your new insurer to claim benefit
How can you lose your NCB benefits?
You have a risk of losing your NCB benefits if:
- You make an early claim on small repairs
- You do not renew your existing insurance before 90 days after expiry
To summarize, NCB is a powerful tool that a customer has to decrease insurance premium. This has to be used carefully because it can only be used once and you don’t want to use it too early. NCB is tagged to a user and not a car and can be transferred from an old car to new. If in doubt, use Arvi to get best recommendation on how to use your NCB bonus.
Want to know of more way's how to save on your insurance premiums. Here's how Deductible's can save a lot of premium cost for you if you have driving and maintenance track record
A reduction in IDV can also give you a discount in your premium, but it comes with its own share of problems, So beware while going ahead with such scenarios.