Smoke, Mirrors and Insurance Discounts

Insurance discounts, and in particular the 65% No Claims Discount, are used extensively by insurance companies to sell insurance. A lot of it is smoke and mirrors, because the "normal" price is not defined.

Here is a bit of a closer look:
If a seller of a product or service promises a discount of say 65%, what does that mean? Logically it means that there is a normal price, and that the receiver of the promise can pay 65% less than the normal price. So if the normal price is $100, the receiver only needs to pay $35. That is quite reasonable. It is also a good deal if the $100 was a reasonable price to start with. What if the original price (the $100) is not known? In other words, the seller promises that he is giving you a 65% discount, but there is no "normal" price? That is hardly a discount but rather a misleading sales promise right?

In the retail space (like clothes) the much used "Sale Now On" sales technique is regulated by requiring shops to have the merchandise in their stores for at least a number of weeks at the normal price, before they are legally allowed to claim a sales discount. So the merchandise had to be on the rack at $100, and for sale to the customers of the store for a period of time, before the store can discount the price to $35 and claim the 65% discount. That avoids the practice of getting merchandise in that should sell for $35, and then sell it for $35 and claiming a 65% discount.

Not so in insurance.

One of the most common practices in insurance is the "No Claims Discount", or "No Claims Bonus", where an insurance company would give you typically up to a 65% "discount" for not having had any claims for a period of time. Consumers take it quite seriously and also take pride in their NCD "status".

What happens in reality? Is there a "normal" price? Is there a $100 that was discounted to $35? Not really. Insurance has no "RRP", or Recommended Retail Price, as each insurance company takes into account a myriad of factors in calculating an individual's specific premium.

To prove the point:

1. Take your insurance premium you are actually paying (let's say it is $700 a year). Your insurance company claims that they are giving you a 65% NCB. To do the maths, it works like this:
   "Normal" premium x ( 1 minus 65% discount ) = Premium you're actually paying
   so
   "Normal" premium x ( 1 minus 65% discount ) = $700
   to make the equation work:
   "Normal" premium needs to equal $2,000!
   Hard to believe.
   
2. 90% of people are on a maximum NCD. That makes it difficult to believe that the maximum NCD is not the market price. With all the steps between a rating scale of typically 1 through to 6, it is hard to believe that the fraction of people (2%?) on a rating 6 is the "normal" price.
   

The advert below (large Australian insurer) has been used extensively in print, on TV and is still used online. Add up the discounts. It comes to 105%! So they're going to pay you 5% of the "normal" price if you're really good? I don't think so.

Clearly the promises are all smoke and mirrors. If you read the fine print, it says that the 20% loyalty discount is available after 15 years. And also: "For customers with a No Claim Discount or Bonus, these are applied after the Multi-Policy Discount and Years of Insurance Discount." Not sure what that means? Clearly the marketing people at this company are not very good with maths. Or maybe they are, and the rest of us isn't?