What is the significance of a "no-claims bonus" in insurance?

A "no-claims bonus" serves as a valuable incentive for policyholders, as it provides a discount to those who have maintained a claims-free record over a specific period. This type of bonus acknowledges and rewards responsible behavior, encouraging insured individuals to avoid filing claims for minor incidents that may otherwise result in higher premiums.

When policyholders have not made any claims, insurers view them as lower risk, which reinforces the relationship between claims history and premium rates. As a result, the no-claims bonus effectively translates into monetary savings on their insurance premiums, making insurance more affordable for those who manage to stay claim-free. This practice helps foster long-term loyalty among customers, as the discount grows over time with continued claim-free years.

In contrast, the other options describe situations that do not align with the purpose of a no-claims bonus. A fee for high-risk insurance policies or an increase in the annual premium would not encourage a claims-free practice and would likely deter policyholders. Additionally, rewarding individuals for reporting claims runs contrary to the motive behind providing discounts for avoiding claims altogether.