Accumulating a no claims discount significantly reduces the cost of you car insurance premiums. So how does this bonus system work and what benefits does it bring.
The theory behind no-claims discounts
Car insurance premiums are based on an assessment of risk - the lower the risk you pose to the insurer the lower your premiums will be. If you have never made a claim before or you have driven for several years without making a claim then a car insurance company is likely to see you as a safer driver and as such will charge you less for cover.
Effectively you are rewarded for not making a claim through a no claims bonus which reduces your premiums. Your discount is usually calculated as a percentage of your premium and can be built up year after year up to a certain limit - usually 65 - 70%.
How does a no-claims discount work?
Every car insurer will calculate a no-claims discount in its own way. Generally there will be a no-claims bonus schedule that indicates how much discount you are likely to receive. The maximum number of years you can build a discount for will also vary, but will generally be set at five.
So, as an example, you may earn a 10% discount for being claim free for one year; a 20% discount after two years; 30% after three years; 50% after four years; and a maximum of 70% after five years.
As the savings that can be made with discount car insurance are considerable, many insurers offer protected no-claims bonus schemes so you can effectively 'insure' your discount. This means that you can make one claim (or possibly more depending on the insurer) within a given period, for example two years, without losing the discount you have already built up. Opting to protect your no-claims bonus will usually be marginally more expensive than choosing not to protect it but that could be a premium worth paying if you do have to make a claim.
How can you build up a no-claims discount?
In addition to offering a financial incentive, a no-claims discount is an incentive to drive safely. By concentrating on your motoring and not driving recklessly you increase your chances of avoiding a car insurance claim and therefore building a discount.
As an incentive to new drivers, many car insurers also offer rapid bonus schemes. This allows young drivers to earn a full year's no-claims discount in a shorter period - such as nine or 10 months. Rapid no-claims bonus schemes are designed to help young drivers bring their premiums down.
