One must avoid car insurance claim in case of minor damages. Why?
First pay the insurance premium, and then avoid small claims, does it make sense?
Yes it will make economic sense due to a factor called No Claim Bonus (NCB).
What is No Claim Bonus (NCB)?
It is a discount issued by the insurance company (on the premium) to the policyholder for making no claims.
This discount increases with time. How?
- 20% – In case of no claim in 1st year.
- 25% – In case of no claims in 2 consecutive years.
- 35% – In case of no claims in 3 consecutive years.
- 45% – In case of no claims in 4 consecutive years.
- 50%* – In case of no claims in 5 consecutive years and beyond.
*One can get a maximum discount of 50% as No Claim Bonus (NCB).
No Claim Bonus (NCB) and Third Party Liability.
Generally people buy following two types of car insurance policy:
- Insurance covering third party liability.
- A comprehensive insurance.
In both these type of insurance, there are two parts to its premium.
First part covers the “own damage” portion.
Second part coverts the “third party liability (TPL)” portion.
Generally the premium distribution between the two is as below:
- 65% – Own damage.
- 35% – Third party liability.
In case the insurance claim has been settled, confirming the damage due to third party’s fault, the policy holder will still be eligible for the no claim bonus (NCB).
But normally this is not the case.
We generally get insurance claim cleared under “own damage” category. Why?
There are two reasons for it:
Firstly, after the accident, we let the person escape due to whom the damage happened.
Second reason is attributable to the complications related to getting the claim verified under “third party liability”. This is a major problem.
Hence getting third party claims is not very common in India.
But if one gets TPL verified, his/her NCB remains safe. What does it mean?
Even after getting the insurance claim, the policy holder is still eligible for the No Claim Bonus (NCB).
But if the claim has been sanctioned under “own damage” category, the policy holder will not be eligible for NCB.
What it means by “not being eligible” for NCB?
Not being eligible for NCB is a loss for the policyholder. How?
If the policyholder does not get discount on account of NCB, he/she will have to pay higher premium.
NCB actually lowers ones premium amount. And for being eligible for NCB discount, there should be no claim made in the preceding months.
Lets understand this with an example.
This example will show the car insurance premium with and without NCB.
This will make the impact of No Claim Bonus (NCB) clearer.
The above example is for the case where no claim has been made for one (NCB @20%) and two (NCB @25%) consecutive years.
For other years, premium savings will be as listed below:
- 1 Year: Saving Rs.1,568/year (NCB @20%).
- 2 Years: Saving Rs.1,721/year (NCB @25%).
- 3 Years: Saving Rs.2,115/year (NCB @35%).
- 4 Years: Saving Rs.2,388/year (NCB @45%).
- 5 Years: Saving Rs.2,329/year (NCB @50%).
So not being eligible for NCB means, losing on the above listed savings.
The higher is the car premium, bigger will be the loss.
How this explains when to avoid car insurance claim?
When to avoid car insurance claim?
When insurance claim will prove costlier than “no claim.”A typical case.
Such a case will emerge in case of smaller claims (small damages).
Lets try to understand this with help of an example.
Suppose there is a person called Raj. He has not claimed his car insurance in last 2 years at a stretch.
Next year, due to 3 consecutive years of “no claim”, he will become eligible for NCB discount of 35%.
His insurance premium will looks as below (with NCB & without NCB discount):
|With NCB @35%||Without NCB @0%|
With NCB discount of 35%, Raj will save Rs.2,115 on annual premium.
Suppose, he recently met with a minor road accident and his car got few scratches.
He got an estimate that, to repair these scratches, the cost will be Rs.1,500.
In this scenario what Raj should do? He should go for car insurance claim or not?
Lets break-up the cost of repair:
- Insurance Cover (say 75%): Rs.1,125.
- Self Cost (say 25%): Rs.375.
- Total Cost of Repair: Rs.1,500 (1,125+375).
If Raj claims insurance, he will save Rs.1,125 upfront on repair.
But next year, he will loose his NCB discount. To get more clarity, lets see the total cost break-up of Raj:
You can see for yourself that, in case Raj does not claim insurance cover, his cost of repair will be Rs.1,500.
But in case he goes for insurance claim, his total cost will be Rs.2,490.
In this example, Raj should not go for insurance claim.
It always advisable to do the savings calculation before claiming insurance cover for car repair.
It is evident from the example of Raj that, smaller claims are worth not applying for.
It is better to take the advantage of no claim bonus (NCB) instead of getting smaller repair done through insurance cover.
Though insurance companies will be more than willing to offer you cover even for smaller repairs, but it is in our interest not to claim cover, in case the damage is small (like scratches etc).
Sometimes it is better to avoid car insurance claim.
Everyone drives different cars. Hence car insurance premium varies from person to person.
Use the above typical example of Raj and do the same calculation for yourself.
Always be aware that, upto what value of repair you will not go for insurance cover.
In the above example of Raj, unless the car repair cost is more than Rs.2,700, it will not be economical for Raj to claim insurance cover.
This small awareness can save a decent amount of money on your car’s insurance cost.