The Insurance Regulatory and Development Authority of India (Irdai) has mandated dematerialisation of new insurance policies by December this year.
Dematerialisation means transforming physical documents into a modifiable online format. Further, Irdai has asked all insurance firms to dematerialise existing and old policies by December next year. The insurance company will pay for all the costs associated with the conversion of all paper-based policies in the online form and policyholders will not have to pay any fees for the e-insurance policy.
The insurance regulator’s directive is similar to how shares are being kept in a demat form in individual trading accounts. Let us discuss what are the associated advantages for the policyholder if the insurance policies are kept in demat form.
In order to digitise insurance policies, dematerialisation or demat allows policyholders to create a portfolio of insurance policies and keep them safely in an electronic form with an insurance repository. So, policyholders could have a single e-Insurance Account (eIA) with an insurance repository of their choice to keep all their policies. As on today, dematerialisation services could be provided by the following four insurance repositories namely National Securities Depository Limited (NSDL), Central Depository Services (CDSL), Karvy Insurance Repository Ltd, and CAMS Insurance Repository Services Ltd. These insurance repositories would maintain the Electronic Insurance Account (eIA) of the insured person and all types of insurance policies — life, general, group — can be stored and accessed through this facility. In the last few years, insurance repositories have helped in electronic issuance, storage, and services for more than 10 million insured persons.
Further, the insurance regulator has proposed a digital platform namely Bima Sugam, for selling, servicing, and settling claims.
The process of dematerialisation of insurance policies is similar to that of dematerialisation of shares and other financial products. However, the essential difference is that in case of stocks, demat accounts allow individuals to buy and sell shares, whereas insurance holders are not permitted to do so with their account. The demat insurance account will provide a one-stop window for policy holders to view all their insurance policies like life, motor, health, etc. All transactions and documents of any type of policies and related information will be stored in just that one place and the insured will have information regarding their policy commencement dates, maturity status, nominations, address, terms, and conditions in their e-insurance account.
Further, the policyholder can download a copy of the same easily any time. When an insured buys a policy, the insurance company will credit that policy in the insured’s repository account. Thus, keeping physical copies of insurance policy in safe custody would no longer be required. Policy holders would be informed about all their transactions and premium payment would be directly transferred to the insurance company. Thus, holding an e-insurance policy would not only be convenient but also eco-friendly and cost-efficient and at the same time reduce frauds.
With digitised insurance policies, banks will find it easy to give loans against such a policy. Also, eventually, dematerialisation could help to establish a thriving secondary market for life insurance policies, as in the case of developed countries, where the original policyholder can sell his policy for a consideration much before the maturity of the policy. Further, with e-insurance accounts, the chances of agency fraud could be less.
The writer is a professor of finance & accounting at IIM Tiruchirappalli. With inputs from A. Paul Williams, research staff at IIM Tiruchirappalli