Why do no claims discounts reduce premium prices?

Why do no claims discounts reduce premium prices?

One factor that car insurance companies base the price of their premiums on is the level of risk associated with each particular driver, so drivers that are perceived as being a 'lower risk' will pay less for their car insurance than drivers that are judged to be a 'higher risk'.
As far as insurers are concerned, the best barometer of risk is the number of years that a motorist has been driving without making a claim on their car insurance and so a no claims bonus is awarded for each year of claim-free driving.
And, as these discounts can be accumulated and are calculated as a percentage of your premium, they can make a massive difference to the cost of your car insurance, in some cases reducing it by up to 75 per cent.

How are no claims discounts calculated?

The way in which no claims discount is calculated often varies from insurer to insurer but, as a general rule, you can expect to earn a 10 per cent discount after one year of claim-free driving; a 20 per cent discount after two years; 30 per cent after three years; 50 per cent after four years and up to 75 per cent after five years.
No claims discounts are granted on all types of policy so, even if you have third party cover, you are still eligible for no claims discounts for each year of you don't claim on your policy.

Ways to build your no claims discount

The only way to build your no claims discount is to not make any claims on your insurance. As explained above, the more years you go without making a claim, the greater your discount will be.
But some insurers offer an accelerated bonus scheme whereby drivers can earn a full year's no-claims discount in a shorter period of time, for example, nine or 10 months. These schemes are usually aimed at young drivers to encourage them to drive carefully to bring down the price of their premiums.

Ways to lose your no claims discount

The most obvious way to lose your no claims discount is to have a claim made on your insurance because you have been at fault for an accident. 
But it's important to note that your discount can be lost even if you are not at fault for an accident and the thing to remember is that it is a no claims discount and not a no fault discount. So, for example, if you are hit by an uninsured driver, have to claim on your policy and your insurance company cannot recover the costs from another party then this will count against you and could mean that you lose all or part of your no claims discount.
This is one reason why some insurers offer 'no claims protection' as an optional extra on their policies. This effectively means that you can insure your no claims discount so it won't be affected even as a result of a claim being made. But this isn't an open invitation to be reckless or make unnecessary claims as insurers will put restrictions on the amount of claims you can make in a given period.
 Although taking out no claims protection will make your premium a little more expensive, it's worth weighing up how much your policy would increase by should you lose some, or all, of your no claims bonus.