Should you steer clear of car insurance no-claim bonuses?

If you're thinking about taking out or renewing comprehensive car insurance, don't let a no-claim discount drive your decision. Research shows no-claim bonuses are not all they're cracked up to be.

Eight out of ten Australian car owners have comprehensive car insurance, and not surprisingly, research by comparison site Choosi shows car insurance is one of the top online search terms across the insurance market.

But if you’re taking out or renewing comprehensive cover, don’t let a no-claim discount drive your choice of insurer. New research shows they’re not always what they’re cracked up to be.

It’s worth clarifying that comprehensive insurance is very different from compulsory third party (CTP or “greenslip”) cover. CTP insurance covers death and injury to people if you are involved in an accident, and as the name suggests it is illegal to drive a vehicle that isn’t covered by CTP.

Comprehensive cover on the other hand is optional—though very sensible to have because it offers financial protection for your car and other people's property if your vehicle is involved in an accident or stolen.

A common feature of comprehensive car cover is a no-claim bonus also known as a no-claim discount. This feature recently came under the spotlight with the Australian Securities and Investments Commission (ASIC) which dished up some interesting findings.

No-claim bonuses are generally presented by insurers as a reward for good driving, and the discounts they offer can seem attractive. I reckon it’s a fair bet that most of us know at least one car owner who has been reluctant to make a claim for a minor ding to their vehicle because they didn’t want to lose their no-claim bonus. 

However ASIC’s research found that no-claim bonuses may not be such an exclusive reward for careful driving. Among most insurers, the vast majority of comprehensive policyholders—between 90% and 99%—have the highest no-claim discount rating. And the discount may not be as generous as it appears. ASIC says most insurers apply the minimum premium anyway.

ASIC also found that if you make a claim on comprehensive car insurance for something that wasn’t your fault (a no-fault claim) you could still end up facing a higher premium even though your no-claim bonus is unchanged.

Following the review, ASIC has recommended that car insurers provide better disclosure about how no-claim bonuses work. For car owners, I reckon the main point is not to be blindsided by a no-claim discount when your policy comes up for renewal.

It always makes sense to see if you could get a better deal elsewhere, and a wide choice of comparison sites makes this easy. Or just pick up the phone, let your current insurer know you are shopping around and ask for their best price. Bundling a few different types of cover with the same insurer can also entitle you to savings on premiums.

Bear in mind, cheapest isn’t always best. Be sure to read the fine print to check for exclusions. Ask friends or work colleagues about their experiences with particular insurers, especially if they have made a claim, or check out some online reviews.

For more information on how comprehensive car cover works, visit the government’s MoneySmart website, seek financial advice or take a look at my book Making Money.

Paul Clitheroe is a founding director of financial planning firm ipac, Chairman of the Australian Government Financial Literacy Board and chief commentator for Money Magazine.

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