18/10/2015
While prices generally tend to rise, car insurance offers a unique proposition whereby premiums can actually go down every year, thanks to No-Claim Bonus (NCB).
Most policyholders are familiar with the broad concept of NCB but often they do not understand the nuances, leading to disappointment at policy renewal.
Here are seven aspects of NCB you need to be aware of:
NCB is a discount only available on renewal of policy
In motor insurance, No Claim Bonus, as the name suggests, is the insurer's reward to the policyholder for not making a claim in the preceding years. That is, NCB - which is a discount ranging from 20-50% on premium payable cannot be claimed as a right but has to be earned by maintaining a claim-free record. When you buy your first comprehensive motor insurance policy, you are normally (except in the rare case of NCB transfer) not eligible for any NCB discount on the premium paid because you have no claim-free record as such. You can claim a starting NCB of 20% on the first renewal of the policy provided there has been no claim during the past year. This discount increases steadily with every claim free year up to a maximum of 50% at the end of five claim free years.
NCB belongs to you, not your car
This is the key feature of NCB - it is associated with the policyholder and not the vehicle. Therefore, you get to retain your NCB if you replace your existing car with a new one or if you switch to another insurer at the time of renewal of the policy. NCB transfer is a fairly simple process: Assume you had purchased a car in 2008, which was then sold in 2013 on or after the 5th policy anniversary. If you never made a claim during the period, you would have earned an NCB discount of 50%. Now, suppose you buy a new car in 2015 and the premium for this car's policy is Rs 18,000 (excluding service tax), out of which Rs 15,000 is the premium for the own damage component. You can transfer the NCB earned on the previous car policy to the new car policy and claim the NCB discount on the first premium payable for the new policy. "Here, the applicable discount on the policy premium for you is 50% of Rs 15,000 which is Rs 7,500, so you end up paying only Rs 10,500 instead of Rs 18,000," says Varun Dua, CEO and founder of web aggregator coverfox.com.
What is not allowed is a person-to-person transfer, except to the legal heir in case he/she inherits the car on the policyholder's death. "Since the car ownership of the deceased will be transferred to the legal heir, so will the policy along with its applicable NCB for that particular car. At time of renewal, the heir is free to choose any insurance company he/she wishes to go with," says Dua.
Transferring NCB
You have to follow a simple procedure to effect this transfer when you are selling your old car and buying a new one. "One, you have to submit forms 29, 30 (buyer-seller agreement form) along with the letter requesting for transfer of NCB to your existing insurer," says Yashish Dahiya, CEO, policybazaar.com, an online insurance aggregator portal. Next, the insurer has to issue an NCB certificate, which is valid for three years and you need to submit the same to your new insurer. If you are switching to a new insurer at the time of policy renewal for your existing car, you only need your last year's policy document or renewal notice that mentions the NCB you are eligible for.
If you are buying the policy online, however, it is likely that you will not have to submit the certificate - your NCB will be transferred based on your declaration. However, this does not mean that you can suppress any claims made earlier, in order to get NCB as your new insurer can cross-verify such information with your previous insurance company. "If there has been a claim, it (the new insurer) sends you a notice for recovery of the discount you may have claimed in the premium wrongfully," adds Dua.
No NCB for third party cover
Remember, the NCB discount is applicable only to the own damage premium component and not the third party liability premium, which constitutes 15-20% of the total premium. For instance, in the example earlier, the NCB discount is Rs 7,500 and not Rs 9,000 (50% of total premium of Rs 18,000).
This means that NCB is not available on third party insurance for cars. For example, if you have only third party car insurance no NCB is earned irrespective of the number of years the policy has been renewed and whether any claims have been made or not.
Small claims can cause bigger loss
While it is tempting to make a claim every time your car suffers minor damages, it is prudent to carry out a cost-benefit analysis before doing so. "This is because NCB reverts to zero even in case of a small claim. By forgoing smaller claims, you could end up saving a lot more in the form of direct discount on subsequent year's premium due to NCB," says Dua. For example, say your claim-free record for a Honda City car bought in 2011 can save around Rs 6,000 (applicable discount of 45%) in the year 2015. Now, if your claim amount in the preceding year is lower than this amount, you would end up making a loss by filing a claim. In addition, circumstances should also be factored in. "If you own an old car - with accumulated NCB of 50% - that you intend to sell, you can forgo small claims, if any, so that your NCB will translate into substantial discount on your new car's premium,"
Protecting your NCB
You can circumvent the dilemma of having to choose between claims and NCB by buying, along with your base insurance policy, an NCB protect add-on cover which safeguards your NCB even in case of a claim subject to certain restrictions. "Let's say that the NCB protect premium for a Honda City 2011 model is Rs 1,000- 1,200 and protects you for one claim in the year. Assuming an NCB discount of Rs 6000 (as in the example above), you would still be saving close to Rs 5,000 overall," . Further, this would be in addition to the claim amount reimbursed.
Sunset clause
The maximum NCB policyholders are entitled to is 50% i.e. once you have accumulated 50% NCB this discount will not increase even if no claim is made in future years. However, there are some exceptions to the ceiling of 50%: Those who had renewed their policies between July 1, 2002 and June 30, 2003 and had accumulated an NCB of 55% or 65%, as per the tariff prevailing before July 1, 2002. Such people are allowed to use and carry forward this higher NCB until there is a claim under their policy. Post the claim, the NCB will reduce to zero and after that the current NCB grid will come into force at policy renewals for such policyholders too.
