6.3 Motor NCD and Policy Excesses

Study Focus

Private-car NCD progresses with consecutive claim-free years. NCD belongs to the policyholder and cannot be duplicated across vehicles.

Motor Claims, No Claim Discount (NCD), and Policy Excesses

Motor insurance operations require a careful balance between providing prompt claim indemnity and curbing fraudulent or exaggerated losses. To achieve this balance, the Malaysian general insurance industry utilizes two essential mechanisms: the No Claim Discount (NCD) system and Policy Excesses. These structures align the financial interests of policyholders with prudent road behavior, loss prevention, and transparent claims settlement.

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The Malaysian No Claim Discount (NCD) System

The No Claim Discount (NCD) is a structured financial reduction awarded on the policy renewal premium to reward policyholders who have made no claims during the preceding policy year.

Purpose and Economic Rationale

The NCD mechanism serves several key functions in the insurance market:

• Incentivizes Safe Driving: Drivers who avoid accidents are rewarded directly with progressively cheaper annual premiums.
• Reduces Moral and Morale Hazard: Knowing that an accident will forfeit substantial accumulated discounts encourages drivers to exercise continuous care.
• Eliminates Trivial Micro-Claims: Policyholders choose to absorb minor car park scuffs or paint scratches out of pocket rather than lodge a claim that would erase an accumulated discount worth hundreds or thousands of Ringgit.

Entitlement and Transferability Rules

Several core rules govern NCD administration in Malaysia:

1. The Person-Centric Principle: NCD belongs to the policyholder (individual or registered corporate entity), not to the motor vehicle. When an individual sells an old car and purchases a new one, their accumulated NCD is transferred directly to the replacement vehicle.
2. No Simultaneous Duplication: An insured cannot apply a single accumulated NCD entitlement across multiple vehicles at the same time. If a person owns a car with a 55% NCD and purchases a second vehicle, the second car must start from 0% NCD unless the discount on the first car is formally relinquished or transferred.
3. Inter-Insurer Portability: NCD entitlements are recognized across all licensed general insurers in Malaysia. If a policyholder switches insurers at renewal, their full discount transfers seamlessly via the centralized database maintained by Insurance Services Malaysia Berhad (ISM).
4. Twelve-Month Earning Period: An NCD tier is earned only after a complete continuous policy period of 12 months without any claim. A short-term policy (e.g., 6 months) does not advance the policyholder to the next discount tier.

Malaysian NCD Scales

The NCD scale differs across vehicle categories, with private passenger cars receiving the highest discount ceiling.

Forfeiture versus Preservation of NCD

If an at-fault claim is made against a policy during the period of insurance, the policyholder's NCD resets entirely to 0% at the subsequent renewal. The Malaysian tariff does not employ a stepped downgrade system; a single fault claim eliminates the entire discount.

However, a policyholder's NCD is preserved under specific, legally defined circumstances:

• Non-Fault Collisions (OD KFK): When the policyholder is involved in an accident where an identifiable third party is confirmed to be 100% at fault.
• Windscreen Endorsement (Endorsement 89): Windscreen repair or replacement claims settled under an active endorsement.
• Specific Non-Fault Add-Ons: Certain standalone endorsements (such as designated towing or minor cosmetic extensions) that explicitly state in their policy wording that claims will not prejudice the base NCD.

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Policy Excesses in Motor Insurance

An excess (also known as a deductible) represents the initial out-of-pocket amount of any claim that the policyholder must pay before the insurer covers the remaining loss.

+-------------------------------------------------------------------------+
|                        TOTAL REPAIR BILL: RM 3,000                      |
+------------------------------------+------------------------------------+
|  POLICY EXCESS (BORNE BY INSURED)  |   INSURER INDEMNITY SETTLEMENT     |
|              RM 400                |              RM 2,600              |
+------------------------------------+------------------------------------+

The Three Types of Excess

Under Malaysian motor insurance rules, three distinct forms of excess exist:

1. Compulsory Excess: A mandatory, non-negotiable excess of RM 400 that motor tariff and industry rules apply under private car policies covering own damage. The insurer must apply this RM 400 deduction if, at the time of the accident, the vehicle was operated by:

   • An unnamed driver (a person not named in the policy schedule for policies using named-driver lists);
   • A driver aged below 21 years old;
   • A driver holding a provisional driving licence ('P' licence); or
   • A driver holding a learner driving licence ('L' licence). Important Rule: Even if multiple conditions apply simultaneously (e.g., an unnamed 19-year-old driver holding a 'P' licence), only a single statutory compulsory excess of RM 400 is charged.

2. Voluntary Excess: An additional deductible agreed upon voluntarily by the policyholder at policy inception. By choosing to absorb a higher portion of any future claim (e.g., RM 500 or RM 1,000), the insured receives an upfront discount on their gross premium.

3. General / Schedule Excess: A baseline excess stipulated by underwriters in the policy schedule based on vehicle risk characteristics, such as high-performance sports cars, vintage models, high vehicle age, or specialized commercial uses.

Excess Application Scenarios

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