No claim bonus

A no claim bonus rewards the years in which nothing went wrong. The workbook's general definition, given among the elements of a non-life policy: NCB is the benefit of lower premiums enjoyed in subsequent years for each year of no claims being made. It can also be offered as an additional bonus cover — more sum insured instead of less premium.

In motor insurance the workbook is specific. "No claim" bonus means a reduction in next year's car insurance premium for own damage when no claim has been made for a specific number of years, and it can go up to 50% of the premium amount where no claims have been made for 5 years.

It attaches to the person, not the vehicle. This is the rule the exam is built on. The workbook states it twice over: the NCB is available to the insured person and is not attached to the car. Two consequences follow, and both are examinable:

• when the insured sells an existing car, the new owner will not be eligible for the no-claim bonus; and
• the original owner can transfer the no claim bonus on the own damage premium to the new car he purchases.

It survives a change of insurer. The workbook: the new insurance company provides the no claim bonus if a policy is shifted at the time of renewal. So shopping for a cheaper own-damage premium does not cost the accumulated bonus — and the workbook separately notes that the own damage portion is not fixed and varies from insurer to insurer, so an online comparison through an insurance broker or web aggregator can save substantial amounts.

Own damage only. The discount applies to the own damage component of the motor premium. Third-party liability insurance is compulsory — no motor vehicle can be used in a public place without it — and is not what the NCB discounts.

In health insurance. Premiums may be adjusted for continued health cover and a record of no claim. Under portability, where the insured switches insurance company, the benefits of no claim, bonus and time-bound exclusions for existing conditions can be transferred — provided the previous policy was maintained without a break.

Mr Iqbal has held motor cover for five consecutive claim-free years. His renewal notice for year six:

The Rs 12,000 saving is worth more than it looks, because it repeats every year the record holds.

He sells the car in year six. The buyer gets the car; he does not get the bonus. The buyer's own-damage premium will be struck at full rate. Mr Iqbal buys a new car, and transfers his 50% NCB to it — on a new own-damage premium of, say, Rs 38,000, that is Rs 19,000 off in the first year of a brand-new vehicle.

He also switches insurer at renewal. The new company provides the NCB on the shifted policy, and because own-damage rates vary between insurers, the comparison itself may save more than the bonus does.

Now the calculation that decides whether to claim at all. A minor scrape costs Rs 9,000 to repair. Claim it, and the NCB resets: his own-damage premium next year goes from Rs 12,000 back to Rs 24,000, and the ladder has to be climbed again over five years — a cumulative cost well above Rs 30,000 on this premium. The workbook's observation that most insured persons are loath to make small claims is the practical conclusion, and it is also why a larger voluntary deductible is popular in motor insurance.

Chapter 3 (Features of non-Life Insurance Products), section 3.1.1, defines NCB among the elements of a non-life product, and section 3.1.2(c) gives the motor-specific rules under "some lesser known facts about car insurance". Expect a direct question on whether the NCB passes to the buyer of the car (it does not) and on the 50%-after-5-years ceiling, and a portability question in the health insurance context.

• NCB belongs to the insured person, not the car. Sell the car and the buyer gets nothing; the seller carries the bonus to his next vehicle.
• Up to 50%, and only after 5 claim-free years. Quoting 50% without the five years, or applying it from year one, is wrong.
• It discounts the own damage premium only. Third-party cover is compulsory and is not what is being discounted.
• Switching insurer does not forfeit it — the new insurer provides it on shifting at renewal.
• In health insurance, portability preserves the no-claim benefit only if the previous policy was maintained without a break.
• It can come as extra sum insured instead of a discount. Both are the same benefit expressed differently.
• A small claim can cost more than it pays, once the lost bonus over the following years is counted.