The Indian Insurance Regulatory and Development Authority (Irdai) has made it mandatory to dematerialize new insurance policies by December this year.
Dematerialization consists of transforming physical documents into an editable format online. In addition, Irdai has asked all insurance companies to dematerialize existing and old policies by next December. The insurance company will pay all costs associated with converting all paper policies into the online form and policyholders will not have to pay any fees for the electronic insurance policy.
The insurance regulator’s directive is similar to how shares are held in dematerialized form in individual trading accounts. Let us discuss what are the associated benefits for the policyholder if the insurance policies are kept in mat form.
In order to dematerialize insurance contracts, dematerialization or dematerialization allows policyholders to build a portfolio of insurance contracts and store it securely in electronic form with an insurance repository. Thus, policyholders could have a single e-Insurance Account (eIA) with an insurance repository of their choice to keep all their policies. To date, dematerialization 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. The insured person’s insurance account (eIA) and all types of insurance policies – life, general, group – can be stored and accessed through this facility. In recent years, insurance repositories have contributed to issuance, storage and electronic services for more than 10 million policyholders.
In addition, the insurance regulator has offered a digital platform, Bima Sugam, to sell, manage and settle claims.
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The process of dematerializing insurance policies is similar to that of dematerializing shares and other financial products. However, the key difference is that in case of stocks, demat accounts allow individuals to buy and sell stocks, whereas policyholders are not allowed to do so with their account. The demat insurance account will provide a single window for policyholders to view all their insurance policies like life, auto, health, etc. All transactions and documents of all types of policies and related information will be stored in one place and the insured will have information regarding their policy’s effective dates, expiration status, appointments, address, its terms and conditions in its electronic insurance account.
In addition, the policyholder can download a copy of it easily at any time. When an insured purchases a policy, the insurance company credits that policy to the insured’s repository account. Thus, it would no longer be necessary to keep physical copies of the insurance policy in a safe place. Policyholders would be informed of all their transactions and payment of premiums would be transferred directly to the insurance company. Thus, having an online insurance policy would not only be convenient, but also environmentally friendly and cost-effective, while reducing fraud.
With digitized insurance policies, banks will be able to easily grant loans against such a policy. In addition, over time, dematerialization could help establish a thriving secondary market for life insurance policies, as in the case of developed countries, where the original insured can sell his policy for consideration well before the expiration of the policy. Also, with online insurance accounts, the chances of agency fraud might be less.
The author is a professor of finance and accounting at IIM Tiruchirappalli. With contributions from A. Paul Williams, IIM Tiruchirappalli Research Staff Member
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