1 August, 2010
In light of the broker’s responsibility to provide “best advice” to clients, we asked the industry experts which option better serves the interest of the client: the traditional no claims bonus concept or the relatively new cash back concept?
The Cash Back or No Claim Bonus (NCB) concepts are based on the same principle and intended to deliver the same objective: to reward loyal clients who don’t claim or claim infrequently. “The short term insurance industry has historically recognised the need to reward clients for every year they do not claim, while penalising clients that do submit claims. The idea is to encourage better risk management, as well as to discourage clients from submitting nuisance claims,” explains Gari Dombo, Managing Director of Alexander Forbes Insurance.
Appreciating the difference between a No Claim Bonus and a Cash Back Bonus
No Claim Bonus
• NCB is earned after 12 months of no claims. There is an immediate benefit in terms of discount in the rate charged.
• NCB is applicable per item and not per policy in general.
• Certain claims are excluded from influencing the NCB of an item.
• The NCB can be transferred from one item to another in case of replacements, such as a vehicle.
Cash Back Bonus
• A cash back bonus is paid out after a set time period, ususally two to four years.
• A cash back bonus is potential cash in the pocket of the client, at a future date.
• If a claim is submitted on any item covered under a section that earns a cash back bonus, the cash back bonus is lost.
The choice: instant or delayed gratification
“A benefit of NCB is that it has a direct impact on the client’s cash flow for the next year, because it is applied as a discount to the rate charged for the item. Another benefit is that it can be transferred from one vehicle or item to another if it is replaced on the policy,” comments Shehnaz Somers, Head: Personal Lines Underwriting at Santam.
“As such, the NCB discount option will reward a client earlier, in fact, from the first premium payable in the insurance period. In addition, the NCB option rewards the client continuously over the life of the policy, particularly in light of the fact that it can be transferred when an item is replaced,” adds Dean Delport, Executive: Insurance at Compass. “In comparison, the cash-back option defers the reward for a few years.”
Immediate reward for a good claims record would seem the logical choice, yet many consumers choose the cash back option. Delport comments that the allure of the cash back option might be the idea that it is a ‘savings’ mechanism. “This would be similar to paying 10% in extra tax to SARS each month, just to get a refund at the end of the tax period! Consideration should be given to the opportunity cost of such a choice, i.e. what other returns could have been possible. The investment opportunity of this extra payment to SARS is effectively lost, because no interest will be earned through such a plan.”
Dombo agrees, saying that financial institutions offer investment vehicles far better placed to assist clients to save and invest money. “Savings and investments are not an insurer’s core business. Clients should be allowed to enjoy their discount upfront and should look for an investment vehicle into which they can deposit the saving on the premium.”
John Bunting, Executive Chairman of Quicksure, sums it up succinctly: “Why wait three years for a possible 20% cash back, for instance, which may never materialise, when you can save 20% immediately on your premium with a reputable insurance company offering a NCB option? It does not matter who you are, or how prudently you manage your risks, accidents or losses can happen to anybody.”
Delport agrees, saying that the NCBs are typically applied, independently, to household goods and motor insurance. “If a motor claim is submitted, only the premium of the specific vehicle is affected under most policies offering the NCB option. The cash back bonus option, on the other hand, may apply across the entire policy or policy section, and one claim on any part of the policy or policy section could impact on the entire cash back pay out.”
Back to basics
While rewarding a client years down the line for not claiming may impact claims behaviour, the basic objective of insurance must not be forgotten. “People take out an insurance policy in the expectation that in the event of suffering a loss or damage they will be able to submit a claim and have their loss made good,” comments Dombo. “Being penalised, or ‘losing’ money for claiming, defeats the whole objective of using a policy to settle losses. One can only imagine the dilemma clients are faced with if they suffer damage or loss and need to claim a few days before the cash back payment!”
In addition, says Delport, some catastrophic events, such as flood, storm and fire are beyond the control of the insured. “Losing a cash back bonus for a claim event the insured could not have prevented or avoided in any way, may be seen as an unfair penalty, especially if parts of the policy not affected by the claim are also impacted.”
What is really important?
“From an advisory point of view, the critical issue is what premium the client pays from day one, rather than what refund the client may, or may not, get at the end of three, four or even five years,” says Dombo. “Clients should understand the full detail of the cover that an insurer is offering, ensure that premiums are competitive, look at the insurer’s claims paying reputation and general client service – rather than focus on what they could be paid out should they not claim.”
Debbei Donaldson, Business Unit Head – Affinity for AON, offers a professional broker’s perspective on the issue. “With the sophisticated level of pricing and risk rating available today, competitive pricing is expected, irrespective of methodology. Our clients expect that, as their broker, Aon will ensure that their premiums are competitive, and remain competitive over the life time of the policy. The notion of NCB versus cash back is irrelevant, provided the client receives a competitive price for the service and the cover received.
“Similarly, the method used to manage claims behaviour should also be appropriate to the client segment. In our experience as a global intermediary, cash back as a reward for behaviour, paid only after an extended claim free time period, is not regarded as an incentive, or even as a key issue in our clients’ insurance decisions. The key purchasing criteria for our clients is superb service during a claim and peace of mind that they will be placed back in the position they were in before the claim event, in the shortest possible time frame. Withholding a claim, or trying to manage a claim recovery themselves, to avoid losing a cash back ‘bonus’ is not a debatable option for our clients, who value the convenience of swift and professional claims service.”
Donaldson adds that it is the broker’s responsibility to inform clients of the impact of their claiming behaviour and the benefits of a particular policy in terms of the service they will have access to, the flexibility of the cover offered, and value invested in premiums. “We do this in a personal way and we actively assist clients in managing their insurance risk profile in the same way that they would manage their credit profile to gain access to lower interest rates and better repayment terms.”