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How does making a claim affect your renewal premium for motor insurance?

Q: After making a claim, I notice that my renewal premium is higher than before. How does this work?

A: The insurance premium paid by the motorist is usually a basic premium (eg $1800) less than the NCD (eg 40%). For simplicity, we do not consider the GST, which is normally added at the final stage.

As a general rule, the insuredís premium is affected by a claim in the following manner:

  1. The NCD is reduced by 30% for every claim. In the above case, the NCD, instead of increasing to 50% for renewal, goes down to 10%. With a lesser discount, the premium of course would increase.
  2. The basic premium is also affected depending on the circumstances & severity of the claim. If the claim is small, eg maybe less than $5,000, the basic premium may increase to $2,000. If the claim is more than $10,000, the premium may increase to $2,500. These numbers are just for reference. Such additional premium is called loading in the insurance industry. Different insurers would have different loadings.

Q: So the claim amount (whether it is high or low) does matter?

A: It sure does. The aforesaid 2 factors would determine the final premium. Basically, while the NCD goes down after a claim, the basic premium also increases depending on the claim amount. The higher the claim amount, the bigger the increase.

So clients may not know the exact claim and may ask an agent or insurer to give a quote based on a lower amount of claim. If the actual (and higher) claim is known to the insurer, the lower premium charged would not be valid.

Q: But it is up to me to declare the claims amount right? How would the new insurer know the exact claims? By declaring a lower claims amount, I can save on premium right? That is one good way of saving money, right?

A: Unfortunately, this is NOT the case and it can be outright risky for the insured!

Normally, after the client signs up the new policy, the new insurer would check with the old insurer (who paid the claim and hence know the exact amount) to confirm the claims status. If the claims status declared by the old insurer is worse (ie higher) than the what the client originally declared, the new insurer can:

  1. either nullify the policy (on the grounds that the client/insured did not declare* truthfully the actual claims status, a critical underwriting factor) **
  2. or ask the client to pay additional premium for the policy.

* Statement pursuant to Section 24(4) of the Insurance Act 1966: You are to disclose to the insurer, fully and faithfully all the facts which you know or ought to know, otherwise the policy issued hereunder may be void.

** this has a SERIOUS consequence potentially. In the event of an accident, the insurance company HAS a right to REPUDIATE claim because the insured FAILED to disclose the all the facts.

It is thus important for clients to declare the correct claims status to get a valid quote.

Q: I get 2 quotations with different premiums from the same insurer, but through different agents. Why?

A: It is likely that different underwriting factors were supplied to the 2 agents. Normally, factors like vehicle make/model and insuredís age etc cannot go wrong. What likely caused the difference is the claims status. If different claim amounts were declared to different agents, you get different premiums, even from the same insurer! Claims status is a critical factor to determine the premium and other terms such as excess. Declaring you have a claim of $3,000 vs $12,000 can cause a big difference in premiums. So you need to check carefully!

Q: If I am insured with Insurer A and made a claim. Insured A paid a claim and hence needs to charge me a higher premium on renewal. I can accept this. But if I approach Insurer B and ask for a quote, I would NOT expect Insurer B to charge me a higher premium because Insurer B did not pay any claims for my policy? Is this logic right?

A: Unfortunately no. The insurer charges a premium based on how risky is this case, NOT based on how much claims it has paid.

If indeed the above logic holds, then no insured would ever need to pay a higher premium. Every time there is a claim, just change insurer!

Imagine you are the insurer. If the insured declared he has made a claim 4 months ago while another insured, with similar conditions (in terms of vehicle and insured profile) BUT did not make any claim in the last 3 years, whom would you assess to be of a higher risk? Does it matter if you, as the insurer, paid this claim or another insurer paid this claim, if you are assessing how risky is this client?