1st August 2025
No claims discounts in private medical insurance can lead to poor decision-making. Applying behavioural science reveals how insurers can rethink how they are structured and communicated.
No claims discounts (NCDs) are a familiar feature within private medical insurance (PMI) policies, rewarding customers who don’t make claims with reduced premiums. This helps insurers manage their risk pools.
However, as the FCA’s Consumer Duty places greater emphasis on transparency, fairness and delivering good outcomes, providers need to assess whether NCDs are achieving these. Behavioural science suggests that the current structure and communication of NCDs may lead to poorer customer outcomes.
Complexity and Customer Confidence
While the principle behind NCDs is simple, the reality often isn’t. In practice, understanding exactly how making a claim will affect a renewal premium can involve working through complicated tables and percentage calculations - a process which feels a lot like doing GCSE algebra. Some examples from a few of the UKs largest providers can be seen below:
Behavioural Science shows that many people struggle when faced with complex numerical information. More than half of the working age population has the numeracy level expected of a primary school child1. While some studies show that over a third of adults say doing maths makes them feel anxious, and one in 5 are so fearful it even makes them feel physically sick2. Complicated financial decisions can lead to cognitive overload, causing customers to disengage or make suboptimal choices.
Customers should feel confident about using their insurance when they need it and be aware of exactly how much making a claim will impact their premiums, without needing to do complex mathematical calculations.
Consumers may not understand that making a small claim could significantly increase their premium next year.
PMI customers may not realise that their NCD works differently from their car insurance NCD.
Loss Aversion and the Decision to Claim
Another important behavioural science concept involved with NCDs is loss aversion - the idea that people feel the pain of losses more than the pleasure of equivalent gains. In the context of NCDs, the fear of losing a NCD you’ve built up over a long period might outweigh the benefit of making a claim.
As a result, some customers might delay seeking treatment, or avoid making smaller claims altogether, out of concern for the potential impact on their future premiums. In PMI this could be particularly important as getting treatment when you need it could lead to better health outcomes.
This issue is particularly acute in PMI as well compared to other types of insurance as it is not as simple as switching providers. Changing PMI provider often means losing cover for pre-existing conditions. This makes customers more likely to stay with their existing insurer even if they feel uncertain or dissatisfied - which makes the design and communication of features like NCDs even more important.
Rethinking NCDs under the Consumer Duty
NCDs are a longstanding feature designed to reward low risk behaviour. However, the Consumer duty has put the onus on providers to improve how NCDs are communicated and understood.
Clearer and simpler information would lead to better consumer understanding and outcomes. Customers should be able to easily understand how a claim will impact their premiums at the time of claim not just at renewal. Some way insurers could help include:
Interactive tools/calculators that show the potential impact of a claim on premiums.
Simpler NCD systems.
More visible communication and explanations about how NCDs work.
Customers shouldn’t be surprised at renewal if they’ve made informed decisions using transparent and accessible information.
Firms must ensure all elements of their products including NCDs offer fair value and lead to good outcomes for customers. This means considering how loss aversion and complexity might influence customer decisions and outcomes and how communication can be improved to support informed decision making.
The aim shouldn’t be to remove NCDs altogether but to rethink them: making them simpler, fairer and aligned with the needs and behaviours of customers. By applying behavioural science and focusing on transparency, the industry can ensure that private medical insurance is delivering better outcomes and peace of mind for its customers.
2
https://www.nationalnumeracy.org.uk/news/third-adults-are-nervous-about-numbers