Cash-Back vs No-Claim bonus

9/5/2008 1:03:50 PM

Over the last couple of years new direct insurance companies have come up with interesting benefits to consumers in the form of cash-back bonuses. The question is does a cash-back bonus have advantages over no-claims bonus’s and what are the main differences?

The cash-back bonus works on the principle that if you do not claim from your insurer for a couple of years, the insurer will pay back an amount in cash to you as a bonus. On the other hand a no-claim bonus is a discount given to you on your monthly premiums for not claiming over a specified period. These may sound very similar but there are distinct differences that must be taken into account.

The no-claim bonus

The no-claim bonus rewards you for not claiming in any year of cover by giving you a discount on your premiums when you renew your policy the following year. The reduced premiums come into effect on the anniversary date of your policy.

After each claim free year your premium is reduced by a greater amount until the next claim free year.

If you do have a claim against your policy you do not lose your entire discount. Some companies will move you back one or two steps which means that the percentage of the discount reduces but does not fall away completely.

Certain claims may or may not affect your no-claim bonus and you should find out which claims are excluded in the calculation of the no-claim discount. Very often claims for damage to a windscreen for instance will not affect your no-claim discount.

It is also important to understand that this is a no-claim bonus not a no-blame bonus as someone in the industry called it. This means that whether you are to blame or not for an accident, if you claimed from your insurance company you will lose part of your no-claim bonus.

Cash Back bonus

The cash-back bonus works as follows. If you do not claim for a period i.e 2, 3 or four years in most cases, the insurance company will pay back a percentage of your premiums of the foregoing period as a bonus in cash. This concept is in response to consumers claiming that they only got something back if they claimed and this created the wrong kind of behaviour from some customers. Customers would claim for the smallest stuff and thus create a lot of administrative work for the insurance companies.

The bonus is only paid if there were no claims on the policy for the specified period. This means that if you claimed for a small accident you lose the cash bonus on the entire policy. Once again this applies regardless of whose to blame.

So lets highlight the most important differences between a no-claim bonus and a cash-back bonus:

Both types of bonuses are to discourage the consumer from claiming for small losses.

Most of the insurance companies states that it is more important to compare the actual premiums you are going to pay. Make sure that you compare apples with apples in the sense that the cover you get and the rules governing the policy should be compared. As an example what is the structure of the excess for instance. Will you pay a fixed amount or will it be a percentage of the damages?

If one premium is cheaper than another, make sure that the policies can be compared. Then look at the extras like cash-back bonuses etcetera.

Both the cash-back and no-claim bonus/discount has been developed to give an incentive to clients for managing their claims better and refrain from claiming for small losses. As mentioned above it is not that one is better than the other but rather that one needs to understand the difference and decide for yourself which one appeals to you.

Till next time.