ASIC has today released a report shedding light on the operation of no-claims discount (NCD) schemes for motor vehicle insurance policies. The report found that these schemes do not operate in the way consumers might reasonably expect.

NCD schemes which are described by insurers as 'no-claims bonus.' 'no-claims discount' or 'ratings' schemes, typically offer discounts to consumers who do not make claims. The schemes are a prominent feature of many comprehensive motor vehicle insurance policies, and are generally presented by insurers as a means of rewarding careful driving. Some schemes also allow consumers to keep the highest no claim discount percentage even when at-fault claims are made.

ASIC found that NCD schemes create an impression that claims history has been separated from other factors that determine the price of an insurance policy. ASIC found that this is not the case in practice, and consumers may not understand the full impact a claim may have on their premium. For example:

• making a not-at-fault claim can have an effect on the underlying premium even where there is no effect on the NCD rating; and
• making an at-fault claim can have an effect on the underlying premium in addition to the NCD rating.

Key findings from the report include:

• Purchased ratings protection can be a poor value proposition:Purchased‘ratings protection’ is a feature offered by most brands that allows a consumer to pay an amount of money to retain their NCD rating, even when making a claim that would otherwise affect their rating.  ASIC found that in some instances the cost of purchasing ratings protection is higher than the benefit obtained by maintaining the NCD rating.
• Disclosure can be improved: ASIC found that while the disclosure of key elements of an NCD scheme varied considerably between brands, there was room for improvement across the board so that consumers can make fully informed decisions about purchasing or renewing a particular insurance policy or about making a claim.
• NCD schemes involve inconsistent messaging: ASIC found that insurers generally position their NCD schemes as a reward for careful driving. However, we found that for most brands the majority of consumers (between 90% and 99%) are on the highest NCD rating.  The concept of rewarding careful drivers is further challenged by brands that offer ratings protection, which can reward drivers who claim and result in partial subsidisation of these consumers by other consumers who do not make claims.
• Some consumers may be unable to realise full discounts: ASIC found that the majority of insurers apply minimum premiums, which have the potential to undermine and limit the full NCD entitlement. It found that the existence and application of minimum premiums is generally poorly disclosed.

While it is not unlawful to operate an NCD scheme, Deputy Chairman Peter Kell said 'ASIC's report makes it clear that insurers who choose to retain such schemes in future should implement measures that will meaningfully improve consumers' understanding of these schemes.  The measures should also help ensure consumers make an informed decision about purchasing or renewing a particular insurance policy or about making a claim.'

'ASIC will continue to monitor insurers to ensure they are complying with their obligations to provide consumers with accurate information, and we will take further regulatory action against insurers where appropriate in relation to these issues', Mr Kell said.

Background

REP 424 furthers the work of a previous report published by ASIC in relation to claims handling and internal dispute resolution in motor vehicle insurance, where we identified some issues concerning the accuracy and clarity of disclosure in relation to NCD schemes: see Report 245 Review of general insurance claims handling and internal dispute resolution procedures (REP 245).

ASIC's MoneySmart website includes further information on car insurance.

Download Report 424 Review of no-claims discount schemes
(REP 424)