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Should you chase your no-claim bonus?

Should you chase your no-claim bonus?

Making a claim on your car insurance, for any amount, affects your no-claim bonus for not one, but six years. Does this mean you should only file a claim in case of serious damage?

If you’ve had any reason to make a claim on your car insurance, you’ve certainly wondered if it will be worth losing next year’s no-claim bonus on. By taking next year’s no-claim bonus into consideration, you’re effectively convincing yourself that your car won’t suffer any damage until it’s time to renew the policy. If this is what has gone through your mind while considering whether or not to file the claim, you should know that factoring in only the next year’s no-claim bonus is not enough. Car insurers have structured the no-claim bonus reward in such a manner that any single claim you make will affect you for the next six years, going up to eight years with some insurers.

Calculating no-claim bonus loss
For every year that you don’t make a claim, you receive a no-claim bonus. If you don’t make a claim in the first year, you’ll receive a 20% discount on your second year’s premium. If you go another year without a claim, you’ll receive a 25% discount. And so it goes until the sixth year, when you’ll receive a 50% discount on your premium for six consecutive claim-free years. This is the minimum no-claim bonus recommended by Insurance and Regulatory Development Authority (IRDA), but some insurers offer even a higher no-claim bonus. Reliance Generaly, for example, will reward the seventh claim-free year with a bonus of 55%, which goes up to a whopping 65% in the eighth year.

As this is the case, if you make a claim after, say, three years of not making one, you not only need to consider whether the amount you’re going to claim is worth 35% of your next-year’s premium, but also that you’ll receive a no-claim bonus of just 20% and 25% in the following two years, as opposed to 45% and 50%.

Here’s how it would work out with most insurers if you made a claim after just three claim-free years. The cost of insurance will depend on which insurer you’re with. This is simply an example to give you an idea of how you can calculate costs based on the approximate cost of insuring a mid-priced sedan of the same age today.

Year Premium If claim is made If no claim is made
No-claim bonus Premium No-claim bonus Premium
First year Rs20,000 0% Rs20,000 35% Rs13,000
Second year Rs17,000 20% Rs13,600 45% Rs9,350
Third year Rs14,000 25% Rs10,500 50% Rs7,000
Fourth year Rs11,000 35% Rs7,150 50% Rs5,500
Fifth year Rs9,000 45% Rs4,950 50% Rs4,500
Sixth year Rs7,500 50% Rs3,750 50% Rs3,750
Rs59,950 Rs43,100

Should you chase the bonus?
If the damage is major, it’s a no-brainer. You have to file the claim. Conversely, if the damage is minor, not even adding up to your premium, you should keep your no-claim bonus. However, in case your bill at the garage is working out to be relatively substantial, keep in mind the following points if you’ve decided not to file that claim.

Earlier the better If your car is newer, it makes more sense to file the claim because the no-claim bonus is smaller, as is depreciation on the parts that are damaged. For example, if your car is just 12 months old, only 5% of the total amount would be deducted as depreciation, whereas in the third year, it would be 25%.

Age of vehicle % of depreciation
Less than six months Nil
Six months to a year 5%
1 to 2 years 10%
2 to 3 years 15%
3 to 4 years 25%
4 to 5 years 35%
5 to 10 years 40%
Over 10 years 50%

Factor in depreciation The parts of your car depreciate at different rates. For example, insurers won’t pay to replace anything made of glass. Then, it will only pay 30% of the cost to replace fibre glass and 50% of damage to tyres and plastic and rubber components. All other parts will depreciate according to the age of the car, as specified above. Calculate how much your claim would be settled for. For example, if the bulk of your bill is for replacing glass and tyres, don’t expect much in return.

Time-value Remember that money has a time value. It will be worth less tomorrow. Accruing the bonus over several years will end up being worth less than being reimbursed the money today. So, if there’s only a small difference between the no-claim bonus and the amount you would be reimbursed, it may make sense to simply file the claim.

Can you manage it? It’s a simple question of whether you’d rather have the money now. You could even see the lack of no-claim bonus in subsequent years as the cost of making the claim today. Effectively, if you need the money today, go ahead and make the claim even if the loss in the no-claim bonus is working out to be comparable to the claim settlement itself.

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