How valuable is my no claims bonus - and should I protect my no claims discount?

In amongst all the cost of living shocks from the past two years, car insurance has seen some of the biggest price hikes.

While energy costs and other utility price increases have led the squeeze on household budgets, motoring costs have not been far behind. According to data from comparison site Go.Compare, by the end of last year the average annual premium had soared 34% from £347 to £465. Insurers have blamed soaring inflation for the significant rise in prices.

Several factors can affect your premium, from your job title to the level of cover you go for. Fortunately, there are many ways in which you can cut your costs - although, it should be said, no one is immune from seeing some sort of price increase.

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One of the best ways to do so - although it isn’t an instant fix for many - is to build up several years of no claims. But how exactly does your no claims bonus impact what you pay for car insurance? Here’s everything you need to know.

What impact can a no claims bonus have on your car insurance premium?

Having any form of no claims record under your belt is a good way of cutting your premiums.

According to the Association of British Insurers (ABI), the trade body for the insurance industry, having just one year of no claims can lead to a discount of as much as 30%. This could rise to 60% if you make it to five years of no claims.

It says: “Your no claims discount builds up with each claim-free year, so the longer you go claim-free the bigger your discount will be.” The ABI adds that discounts can “vary from insurer to insurer” but tend to be a “very competitive area” for the car insurance market.

Separate findings from comparison site Compare the Market showed annual premiums fell by £745 (32%) after 12 months of no claims. Follow-up discounts for year two sat at £354 (23%), and £219 (18%) after the third year. By the 10-year mark, the difference in price between the no claims haves and have nots was £1,772 on average.

When you consider that a new, young driver (under 25-years-old) is now paying £2,009 a year on average for their car insurance, wracking up a decent bank of no claims can make a huge difference.

How to keep hold of your no claims record

Clearly, having a no claims record is valuable when it comes to lowering your car insurance deal. So, it’s vital to do all you can to protect it.

For starters, you should keep hold of the documentation that proves it exists. Julie Daniels, Compare the Market’s motor insurance expert, says: “The easiest way to check your no claims discount policy is to look at the documentation provided by your insurer, which may have been sent in the post or might be available online.

“If you cannot find the details in your renewal notice or other paperwork, you may wish to get in touch with your provider directly.”

Having this proof is especially vital when you’re switching insurance provider. There is no centralised supplier database that allows insurers to share your record with each other when you switch.

Given your insurance renewal date is likely to be your no claims anniversary, it may mean you can’t immediately get hold of the documentation proving to your new insurer that you have the number of years with no claims you say you do. When signing up to a new provider, you’ll have around a month to provide the necessary evidence. Failure to provide it could land you with a financial penalty - or you may even have your policy cancelled.

Another thing to consider is protecting your no claims record, especially if you’ve built up a long no claims history. If you have a prang that’s your fault, and don’t have protection for your record, it’s likely to mean you’ll have to start from scratch (it’s worth checking your insurance terms and conditions as some types of claim won’t affect your no claims). Not only will this mean you cannot access a decent discount when you next renew, it’ll also put your premiums up anyway because you’ve had to make a claim.

The ABI told MoneyWeek: “Some insurers offer protected no claims discount policies which allow customers to make a certain number of claims over a specified period of time without affecting their no claims discount.”

Usually, you’ll be able to make two claims over a three to five-year timeframe without losing your no claims record, the trade body says. But Compare the Market says some providers may take a year or two off your no claims record if you do have to make a claim. Your premiums may also go up because of these claims, even though you’ve maintained your discount.

It’s worth noting that you’re likely to see an increase to your premium, or the excess you have to pay per claim, if you take out no claims protection as part of your policy. The additional cost could save you money in the long run, however, as having less than a year of no claims means your premiums will soar.

Finally, if you stop driving, it could well spell the end of your no claims discount record. Some providers may recognise your record if you’ve only been away from the wheel for a year. But any longer and it’s unlikely that you’ll be able to find a provider who’ll accept your record.