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You shouldn't protect your no claims bonus

You shouldn't protect your no claims bonus

Each year that you don't make a claim on your car insurance policy, you can earn an additional year's “no claims bonus” which is a discount that reduces the price next year, even if you switch to another insurer.

Most insurers give you their maximum bonus when you reach five years of no claims, which can more than halve your premium.

If you make a claim and your insurer can't recover all of its costs (for example because it was your fault or because blame couldn't be proven) then your no claims bonus is normally cut.

If you have five or more years' no claims bonus, most insurers will reduce it to three years. If you have four years' no claims bonus, it's reduced to two. If you have three years' no claims bonus it is reduced to one and if you have one or two years' it's reduced to zero. You can rebuild your bonus by avoiding claims in future.

Protecting your bonus

Once your bonus has reached four, or usually five, years, insurers will start to offer to protect your bonus at an extra cost. Protecting your bonus means that, if you have a claim, your premium will go up less than if you had not protected your bonus.

Notice that your car insurance premium probably will go up (everything else being equal) even if your bonus is protected, but by less than if it was unprotected. That's because, while you still have the full no claims bonus and the discount that comes with it, your record is worse because you have a claim on your policy.

So a policyholder might see his insurance jump from £390 to £440 if he protected his bonus, whereas the same car owner might have paid just £350 with a non-protected bonus (and for a similar policy excess), but £510 the year after making a claim.

As the years go by, if there are no further claims, the premium will sink back down quite rapidly as claims gradually disappear from the record.

Protected bonuses aren't all equal

Protected bonuses usually reduce the impact of claims, but some do so more than others.

Some will protect you against one claim per year, another might against two in two years or two in three years. Other insurers will guarantee you protection regardless of the number of claims you have to make.

Meanwhile, some insurers exclude certain incidents from protection.

How much protection costs

Consider a hypothetical comparison using a second-hand, £5,000 Mercedes C Class bought by a 30-year-old with no claims. (Note that your results will also vary depending on many other details you enter, such as post code and driving history)

After comparing dozens of insurers, I found that the policyholder is being asked to pay £387 by the cheapest insurer offering protection, and £348 – that's £39 or 10% less per year – by the cheapest insurer offering a non-protected NCB. Usually, this won't be the same insurer.

Some insurers only sell policies for good drivers with a “free” protected bonus as standard. In reality, the cost of the protection is built into the premium it quotes you.

Why the cost can be too steep

Having worked in the insurance industry in various roles, I've written about protected bonuses before. I was reminded of it last week when I read a press release that came to some seemingly odd conclusions, which made me think it was worth revisiting this subject. Here's what I found in my tests.

The policyholder paying £387 to protect his bonus would pay an average £397pa over four years if he made a claim in the first year. After that, his record should be clean again.

If he didn't protect his bonus, he'd start on £348, but because of the claim his premium would average £405pa over the four years. That's an extra £8pa or £32 in total.

There's not a great deal of difference there whether the bonus was protected or not.

On the other hand, if he didn't have to claim until the following year, he'd have been better off by not protecting in the longer run. The more years he goes claim free, the more he'll save. Four claim-free years, for example, might leave him around £160 better off than if he'd protected.

Multiple claims in close succession

Having more than one claim in close succession is the nightmare scenario if you haven't protected, since it will probably reduce your bonus to one year to zero. Each additional claim will probably still increase your premium if you have protected your bonus, but not to the same extent.

So, what if our hypothetical driver made one claim two years in a row? If he protected his bonus his premiums might average £420 over five years, by which point he might expect his record to be clear again.

However, if he had not protected, he'll pay an average £520 over those five years. That's £100pa extra, or £500 extra in total.

It could take a dozen claim-free years to recover to the same financial position after that. If you've now been chastened into protecting your bonus, you have no chance of recovering the difference.

The situation could be even worse if both claims occurred in the first year, or if the policyholder claimed three or more times.

Three factors to consider

No two quotes are alike, so some might be asked to pay more for protection than others. Also, no two drivers have the same attitudes, abilities and risks.

The price you should be willing to pay to protect your no claims bonus will be higher the more cautious you are about taking risks and the less confident you are in your driving or in the risks to your vehicle of vandalism, fire or theft in the areas you park and drive.

You might have a tight budget that limits the risk you can take of paying a high premium in any one year. The more you drive, the higher your risks are, too. Conversely, if your car is in the garage most of the year, the risks are comparatively low.

Whether you protect your bonus comes down to balancing all of these things: the prices available to you, the risks to you and your vehicle, and your attitude to those risks.

But beware that most people underestimate risks while overestimating their driving ability!

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