Following the announcement by Direct Line that from January 2008, new and existing customers who suffer damage to their cars caused by vandalism will not have their no claims discount disallowed should they make a claim. My question is, is there still a need for the traditional ‘No Claims Discount’?

The use of ‘NCD’ as a marketing tool has been prevalent within the last few years as insurers try to be innovative and want to be seen as providing the highest discounts in the market. Companies such as Direct Line and the CIS have introduced a new slant of the use of ‘NCD’, stating that all named drivers on its policies can earn their own ‘NCD’, whereas Esure has advertised the fact that its policyholders can get up to a “massive 75%” no claims discount. 

This discount seems to have been around since the dark ages, and in fact it was first introduced by Cornhill Insurance in 1957.  For fifty years motor insurance underwriting has used a ‘no claims discount’ scale when calculating insurance premiums. Therefore, is there now an opportunity to dispense with this out of date method? Gone are the days when the policyholder’s new insurer would require to see proof of any no claims discount earned, and most insurers now only require the previous insurer’s policy number.

I believe that only a small percentage of policyholders NCD claims are checked with previous insurers through auditing, and therefore, there is always the possibility of policyholders abusing the system.  There is also another issue, some insurers are providing introductory discounts of up to 65% for drivers who have a second car, have been a named driver on another policy or for ex-company car drivers, provided that they have been claim free. Therefore, is the need for a traditional ‘no claims discount’ still relevant and fair?.  

Adopting a ‘claims made’ scenario may be a fairer way of insurers applying discounts for claim free driving. There are a number of insurers in the ‘high net worth’ market who currently use this method when calculating discounts, and there is no reason as to why the standard motor market cannot do the same. Over the years insurers have developed a more sophisticated underwriting approach and would be able to factor any discounts necessary if they adopted the ‘claims made’ approach.

Even though this is a possibility, I believe that insurers will still continue to use the traditional ‘no claims discount’ system as it is a way of obtaining extra premiums for covers such as ‘protected and guaranteed’ no claims discount,  even though this could be factored in if the ‘claims made’ approach was used. It appears then, that the insurers will still continue to use ‘no claims discount’ as a marketing tool as a way to differentiate themselves from their competition.