No Claim Discounts (NCD)
INTRODUCTION
Insurance is a pool of similar or same risks. The basic concept of insurance is that the losses of few are met by the contributions of many who are exposed to same or similar potential risk. It is then fair to charge the people who are bringing these risks to the pool same premium. It is also fair to reward people who might also not take money (making claims) from the pool as compare to people who frequently claim huge sums of money from the pool to cover for their losses. When people begin to realise that, those who are not taking from the pool are rewarded, others would put measures in place to also control or mitigate potential losses and enjoy same benefits. These are basic principles that most welfare clubs understand and implement to guide their operations.
CLASSIFICATION OF MOTOR VEHICLES
Motor Insurance bring all owners of motor vehicles who are face with similar risk together. There are three main basic motor insurance covers. These include; third party cover, comprehensive cover and third party with fire and theft cover. Motor vehicles have also been classified into various types, especially depending on their usage and type. These classifications also help to charge the policyholders equitable premiums for the risks presented to the pool. For instance, someone would buy Honda Civic 2010 model and use it as private vehicle. Another could buy same vehicle and use it as taxi. The taxi would probably be used on road more times and most often carry five passengers. The private vehicle could be used by the insured only and also just for his business and social purpose only. This simply means, even though, it is same Honda civic, the usage would mean there would be different risk and the premiums would have to be different.
RELEVANCE OF MOTOR TARIFF
As part of bringing sanity into the insurance industry and helping all insurance companies to play on a fair and equitable grounds and to also strengthen the insurance industry, a motor tariff has been provided for the insurance companies to use. The tariff sets the minimum premium approved by the National Insurance Commission. This is to prevent insurance companies from charging very low premiums. This helps them to charge commensurate premium to the risk they are insuring so that they can remain solvent and also meet all their management expenditure and their claims, and at the end of the day generate profit for their shareholders.
Motor Insurance is huge portfolio in the General insurance sector in Ghana in terms of premium generation and numbers but almost all insurers make underwriting loss in this class of business. The cost of motor claims are always going up whiles insurers always find a reason to reduce the premiums for policyholders. A lot of discounts were allowed before the 2010 Motor tariff was introduced. These discount included; starter discount, special discount, valued client discount, group discount, preferential discount, fleet discount and No Claim discount. All the discounts were annulled remaining the No claim discount (NCD) and the fleet discount (FD) only. These two discounts were also exhaustively defined and explained.
NO CLAIM DISCOUNT (NCD)
Actually, the NCD is supposed to be earned by the insured. The No claim discount (NCD) is allowed in event of no claim being made or arising under a policy during the period of insurance specified in a schedule of a policy immediately preceding the renewal of a policy, the renewal premium for such part of the insurance as is renewed shall be reduced as follows:
| Year | Private Vehicle | Commercial Vehicle | Motor Cycle |
| New | 0% | 0% | 0% |
| 1 | 25% | 15% | 10% |
| 2 | 30% | 20% | 10% |
| 3 | 35% | 25% | 10% |
| 4 | 40% | 25% | 10% |
| 5 | 50% | 25% | 10% |
Note that, where there are more than one motor vehicle described in the schedule, the No Claim Discount shall be applied as if a separate policy had been issued in respect of each of such motor vehicle. Again, if one claim is paid under the policy with respect to a motor vehicle, the No Claim Discount applicable at renewal shall be stepped down to the level of the preceding insurance period. Where two claims are paid for within the same period of insurance, any No Claim Discount earned shall be forfeited. Do not forget that, insurance is a pool and the amount that was used to pay the claim is from other people’s contribution to the pool of fund.
TRANSFER OF NCD
There are different ways an NCD could be transferred and these include the following;
- Substitution of old vehicle with new vehicle. This means the old vehicle is no more in use. This could be done at mid-term or at renewal.
- NCD could also be transferred from one insurance company to the other for the insured. These normally happens when an insured travels and his old car is not in used anymore. Can NCD be transferred when it’s being enjoyed by the insured on another vehicle? The simple answer is no. No claims discounts can usually be transferred to another car, but if you switch insurers or insure another vehicle before the year is up, you won’t get the NCB. You can’t use your no-claims discount on more than one car. The contract is one year and all new terms could be review at renewal of the policy. This means at renewal of the policy, the insured have the right to transfer the NCD unto a new vehicle which he wants to insure.
- What about an insured who want to transfer his NCD on old vehicle from one insurer to his new vehicle he wants to insure with another insurer. This could still be done at renewal of the old vehicle. The insurance company should provide proof for the insured to send to the other insurer. These have to be verified between the insurers.
FLEET DISCOUNT
The fleet discount is used as a fleet management tool to reward policyholders with not less than five (5) vehicles into the pool. The maximum discount shall be graduated depending on the volume of business as indicated below;
| No. of Vehicles | Discount |
| 5-10 | 5% |
| 11 – 20 | 10% |
| Above 21 | 15% |
Note also that, this is for one policyholder who is bringing a lot of risks into the pool and might also be paying more premium. This is not for a group of people. For instance, some schools give discounts on fees to parents who have more children in a particular school.
ARE DISCOUNTS SERVING THEIR PURPOSE?
Now the big question is, are these discounts serving their purpose. Currently, Insurers allow discounts to proposers who are able to negotiate well. Something that, policyholders are supposed to earn are now being bargain for. This means if you are not able to negotiate well or you do not like negotiation, then you will be paying higher premium. Ask yourself, where is the fairness. It is possible someone might not be making claims but because he does not know how to negotiate well, he would be paying higher premium than someone who has made multiple claims and is able to negotiate well with the insurance company. Insurers are supposed to step down No claim discounts when insureds make claim, but ask yourself how many companies practice this. Insurers rather increase the discount so that, they can retain the business. People buy vehicles for the first time and are able to negotiate for an NCD of 50% with Fleet discount of 15% on one vehicle.
Insurance companies currently use discounts as a way to massage or manipulate premiums for clients. This does not promote fairness in the industry. This also means that, insurance company that decides to adhere to the directive concerning discount might lose clients to other insurers. This also means that, clients could also have different premiums base on the company he goes to insure. The most serious thing is that, insurers then compete on price. This has led some insurers to undercut or under-price premium just to outwit and win business from a sister company. A lot of undercutting or under-pricing also may affect the liquidity and solvency of the company. Insurers should remember that, when they under-price or undercut a premium for a motor risk, it does not lessen or reduce the risk. The risk remains same and when there is a loss, the insurer might not have enough funds to pay for the claim. We should all know that, the rates to charge for a risk is not by chance. When you talk to actuaries, you will appreciate what goes into determining the premium rates and the dangers of given the discounts freely. We might do all kinds of things to win business, but if the company is not solvent in the near future, who lose?
Insured make claim and still enjoy the maximum NCD discount. The insureds now do not realised the relevance of NCD. What they are supposed to earn for not making claim in the 6th year of doing the policy is given to them at the inception of the policy. The same client comes at renew and still expect insurers to reduce the premium further. This leads to undercutting by most companies.
ARGUMENT ON NCD APPLICATION
- NCD IS FOR THE INSURED
Some school of thought argue that, the NCD is for the insured. This means, the policyholder can transfer the NCD from one vehicle to other vehicles which are all registered in his name. This school of thought believe that, it is the person that drives the vehicle and has earned the discount due to his good way of driving.
- NCD IS FOR THE VEHICLE
This school of thought believe the NCD is on a particular vehicle. They argue that, the physical nature of the vehicle contribute to not having any motor crash. Take for instance, a corporate vehicle which is not driven by one person but number of different drivers. Which of the drivers would enjoy the NCD or could transfer the NCD unto his private vehicle. Or the NCD would be in the name of corporate institution? But the institution itself can not drive the vehicle. The vehicle is being driven by individuals who are staff of the institution.
- NCD IS FOR THE INSURED ON A PARTICULAR VEHICLE
This school of thought believe that, the insured earned the discount not just because of how good he drives but the subject matter of insurance also comes to play. They believe, the physical nature of the vehicle also contribute to not having accidents and making claims. They believe both moral conduct of the driver and the physical nature of the subject matter of insurance are intertwine. This means, even though the insured has earned the discount, it cannot be transferred unto another vehicle because the physical nature of that vehicle could be different from what the insured is used to.
- THE PRACTICE IN GHANA
One of the underlying conditions in motor underwriting in Ghana is open drive. The policy does not restrict the driver to only the insured or the policyholder. This means that, even though the vehicle is insured in the husband’s name, the wife could still drive and when there is an accident, the insurer will meet the claim. But the discount was given and the premium paid because of the policyholder.
The insured could have earned 50%NCD, but another person for instance, the son who has just driven for a year could be the one using the vehicle. But when the son is involve in an accident, insurers will still pay the claim and then step the NCD down which would be penalizing the policyholder rather than the driver.
With this practice in Ghana, I believe and side with the school of thought that argue that, the NCD SHOULD BE FOR THE VEHICLE AND THIS CAN NOT BE TRANSFERRED.
NO CLAIM DISCOUNT VS. CLAIM – MADE LOADING
It looks like it is difficult to manage the NCD. In this regards, I strongly believe what has been done for the third party motor insurance, same could be done for comprehensive? All discounts could be abolished and the rates would be reduced.
Any time, a policyholder makes a claim, his premium would be loaded at renewal by same percentages used in giving the discounts. We can study the table below;
| Year | Commercial Vehicle | Private Vehicle | Motor Cycle |
| New | 0% | 0% | 0% |
| 1 | 25% | 15% | 10% |
| 2 | 30% | 20% | 10% |
| 3 | 35% | 25% | 10% |
| 4 | 40% | 25% | 10% |
| 5 | 50% | 25% | 10% |
If discounts are abolished from comprehensive and rates reduced, it would affect our Gross Written Premium but this would help also to reduce the number of people who would want to make a claim because of the loading at renewal. Policyholders would begin to appreciate the effects of making claims. They will appreciate the fact that they pay lower premium when they do not make claim. The loading would also follow you wherever you go to insure and people could be blacklisted. Policyholder would be concern about people who drive their vehicles because they would pay high premium when their vehicle is involve in an accident. This penalty should be on a particular vehicle.
This would also eliminate the issue of transfer of NCD unto new vehicles. People would not transfer the loading on their old vehicles to new ones, never.
Someone might disagree and think that, insurance has its own basic principles and discounts are supposed to be part of the policy. But my only question is, what is the relevance, if the discounts are not serving their purpose and it can lead to collapse of the industry?
Ref:
CII Study text, Insurance legal and regulatory, 2019
https://www.confused.com/car-insurance/guides/car-insurance-buyers-guide-no-claims-bonus-explained
