Update on ASIC’s Review of No-Claim Discount Schemes for Motor Vehicle Insurance
On 26 February 2015 ASIC released a report on the operation of no-claim discount (NCD) schemes on motor vehicle insurance policies (also called ‘no-claim bonus’, ‘no claims discount’ or ‘ratings’ schemes) that are presented as a way of rewarding careful drivers who don’t make claims.
After considering a variety of issues ASIC determined that these NCD schemes do not work in a way that consumers would reasonable expect and made a series of recommendations set out below.
Whilst ASIC does not indicate that it proposed at this point to take any regulatory action, it makes a number of recommendations that if the industry does not address can lead to such a response.
|NCD schemes do not work in the way consumers might reasonably expect:
NCD schemes create an impression that claims history has been separated from other factors that determine the price of an insurance policy. However, this is not the case.
ASIC stated that:
|Where insurers retain the traditional NCD pricing model, insurers should clearly disclose the effect of a claim on an insured’s NCD rating and underlying premium.
Where appropriate, insurers should clearly disclose whether claims can affect the underlying premium independently of any effect on the NCD rating.
|Purchased ratings protection can be a poor value proposition:
Purchased ‘ratings protection’ is a feature offered by most insurers that allows an insured to pay an amount of money to retain their NCD rating, even when making a claim that would otherwise affect their rating.
ASIC stated that in some instances the cost of purchasing ratings protection is higher than the benefit obtained by maintaining the NCD rating.
ASIC also found that once an insured has opted to purchase ratings protection, it is automatically renewed on an annual basis (i.e. it operates on an opt-out basis).
|Where insurers retain the traditional NCD pricing model, an insured should be made aware of the cost and value of purchasing ratings protection.
Disclosure of the automatic inclusion of optional extras, such as ratings protection, on policies at renewal should be made clear.
|Disclosure is generally inadequate:
ASIC stated that although insureds are reminded of the value of attaining and maintaining an NCD rating during the life of the policy the level of disclosure of key elements of NCD scheme operations is generally inadequate, preventing consumers from being in a position where they are capable of making informed decisions about purchasing or renewing a particular insurance policy or about making a claim.
|Insurers should review and, where appropriate, improve disclosure and/or make available additional information on the operation of NCD schemes.
However, disclosure should be appropriately managed so that consumers are not discouraged from making valid claims under their policies.
|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.
ASIC stated that the existence and application of minimum premiums is, in general, poorly disclosed.
|Insurers should disclose to consumers the existence of minimum premiums.
Where the minimum premium is sufficiently high to have the potential to affect an insured’s ability to realise their full discount and other promotional entitlements, that risk should be disclosed.
|NCD schemes may involve inconsistent messaging:
ASIC found that insurers generally position their NCD schemes as a reward for careful driving.
However, for most insurers the majority of insureds (between 90% and 99%) are on the highest NCD rating.
The concept of rewarding careful drivers is further challenged by insurers that offer ratings protection, which has the capacity to reward drivers who claim resulting in the subsidisation of these insureds by other insureds who do not make claims.
|Insurers should ensure that promotional messages on the benefits of NCD schemes, where such schemes are retained, are carefully balanced against the actual features, risks and practical operation of the NCD scheme.