Explaining no claims discounts, bonuses and protection, how these things can impact on the price of your car insurance, plus implications for telematics policies.
A no claims bonus (NCB) on your car insurance should be a fair reward for careful driving.
But like many things in life it's not always fair - and the reward doesn't always go to the most deserving.
Firstly, a note on terminology. Strictly speaking, a NCB only applies to the main driver on an insurance policy, whilst a no claims discount (NCD) could, in some cases, also be given to a secondary or named driver.
In reality, a bonus or discount amounts to the same thing - a reduction in the calculated price of your premium as a reward for not having made a claim against your policy.
A bonus is awarded for each continuous year you hold private car insurance in your own name without making a claim.
Most companies only accept NCB earned in the UK and from policies expired within the last two years.
Your most recent renewal notice will indicate how many NCB years you've earned. Alternatively, you can speak to your current insurer to find out.
Remember that you'll need to provide proof of your NCB when taking out a policy with a new insurer.
Some insurers typically offer up to 70% reductions for five years of no claims
Your no claims bonus applies to a single car and, although it can be transferred to an alternative car, it can’t be applied to an additional car or another vehicle.
A number of insurers will give discounts or allow you to mirror your NCB on a second car, but you need to check with individual insurers to find out if they offer such incentives
It's possible to build up multiple NCBs on vehicles insured under different policies.
How much less depends on the individual insurer. Some insurers typically offer up to 70% reductions for five years of no claims. Others will go to a maximum of around 60%.
That means if the headline figure on your annual premium is £1,000, then five years of no claims could reduce that to only £300.
The bonuses don't apply for the first year and only kick in after 12 months of claim-free driving. So, you might be given a 30% reduction after year one, 40% after year two, and up to 60-70% after five years.
Should you be involved in an accident and need to make a claim, then your hard-earned bonus could be wiped out when it comes to renewal. In other words, you'll be back to year zero.
With that in mind, insurers offer to 'protect' your no claims bonus.
For a fee, your bonus will not all disappear in the event of a claim.
Instead, the clock will only be turned back, perhaps for two years and not all the way to year zero.
For example, that £1,000 premium - which had come down to £300 with five years of no claims - could be back up to £550 after the claim, but not back to £1,000 because of the protection.
The following year the premium could be down to £450 and then the next year it could be down again to £300.
It might appear, then, that the protected fee had saved you hundreds of pounds, but remember to factor in the cost of the additional fee itself - perhaps around £50 a year - to calculate the true saving. And that's before you get into the rising price of the premium…
At this point, the whole no claims bonus notion can get rather blurred and leave the consumer rather irate.
That's because it's important to remember that what you've protected is the bonus or discount - and not the price of the premium itself.
Once you have an accident and need to make a claim your insurer is very likely to increase the premium, regardless of any bonus protection.
"Every time you make a claim you usually lose two years' no claims bonus," said car insurance expert Scott Kelly.
"But insurers are still looking at the underlying risk. It doesn't matter whether you have five years bonus on paper, you still have to declare claims. A claim will affect your risk and your premium.
"You might pay, say, £30 to protect your bonus, but the insurer will look at the underlying risk - whether you have made a claim in the last 12 months.
"They will then price your premium accordingly."
In this light, it's easy to view no claims bonuses as marketing tools for the insurance companies as much as they are rewards for careful consumers.
They offer companies a chance to compete in a very intense market and even Malcolm Tarling, spokesman for the Association of British Insurers, says: "Of course, there is a marketing element in offering no claims bonuses, but we believe they still offer good value… we think it still pays to protect bonuses."
Consumers should shop around for cover, and using price comparison sites such as Gocompare.com can help them to find the right deal at the right price.
It should also be remembered that, just because an insurer offers a generous bonus one year, it doesn't mean the premium will remain low when it comes time to renew.
"Some insurers may go up to 60-70% discount off their rate for five years no claims," said Kelly. "But in many cases this is a new business price, it's a price to get you through the door.
"Where consumers get very angry is when they get that new business price, have no claims, but find that the next year the price has gone up. It shows that often loyalty doesn't pay."
Normally a bonus is only available to the main driver and named drivers cannot gather NCBs, no matter how long they've been driving without a claim.
The landscape for both bonuses and discounts could change as the use of telematics becomes more widespread
Some insurers, however, will allow named drivers a discount if they've been driving claim-free.
Gocompare.com found that out of 229 comprehensive car insurance products around 20% allowed named drivers to accumulate their own NCD.
It should be noted, however, that unlike regular proof of a no claims bonus that can be used with any insurer, it's normally only possible to use the named driver discount with the insurer who awarded the named driver a NCD in the first place.
The landscape for both bonuses and discounts could change as the use of telematics becomes more widespread and premiums are calculated on a 'pay-how-you-drive' basis.
At present, telematics allow an insurer to determine more precisely how safely you've been driving and how much of a risk you represent. They will know how fast you drive, where you travel to, even where you park your car.
This information should enable them to offer cheaper premiums to safer drivers but, unlike regular bonus history, the driver's statistical score is not yet being handed over to the policyholder if the customer wants to shop around.
"You can't get that driver's score from your insurer because it's still very early days for telematics and the industry has not yet figured out common data standards," said Kelly.
"At the moment it means that consumers are being a little short-changed.
"It's a little like turning around to a consumer who asks for a three-year no claims certificate and saying, 'No, I'm not going to give you that because I don't want the rest of the market to know what a great driver you are'."
Malcolm Tarling concedes that it's early days for telematics, but says: "Once this market becomes a little more mature then the transfer of information between insurers should not be an issue. Insurers will want and expect access to the new information and it will become available."