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No-claims discounts: just a marketing gimmick?

The figures look enticing, but are great no-claims discounts any match for just shopping around?

I was at a dinner party the other day when someone bent my ear about car insurance. This particular person was telling me that he thought his insurance company was great, as he had just qualified for a 70% discount for not claiming in the past five years. If I didn’t know better, I would have been amazed by this offer. However, backed up with knowledge from my insurance background, I asked him for his details and ran through a quote for him when I got home.  To his amazement, we found out that another company could beat his car insurance premium by about £140!

So how is this possible with such a large initial discount? Well, all insurance companies start with what I call a ‘risk price’ or ‘initial premium’. This premium is then increased or discounted depending on the individual and the specific risk they represent. So, if a company starts with a high risk price, even if they apply a large no-claims discount, you may still end paying more than you need to.

To get a bit more technical – you will not often see your discount applied in absolute terms. Imagine it this way: the insurer starts out with your ‘initial’ premium. Your no-claims discount is then applied to this base premium, before the rest of your premium is calculated. So, if you are offered a 20% no-claims discount by your insurer, it is very unlikely that your premium will be exactly 20% less than it was the year before. The reason for this is that, if any of your policy details change even slightly, the premium for your policy will change as well. If you’re lucky your premium might be more than 20% cheaper, but this is a rare situation!

So, in short, I believe that even though it is great to build up a no claims discount, it is to some extent a marketing tactic. No matter what the size of the discount, you should always shop around!