With digitized insurance policies, banks will find it easy to give loans against such policies.

The Insurance Regulatory and Development Authority of India (Irdai) has mandated the dematerialization of new insurance policies by December this year.

Dematerialization means transforming physical documents into a flexible online format. Further, Irdai has asked all insurance firms to dematerialize 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 procedures into the online form. 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.

Mechanics
In order to digitize insurance policies, dematerialization 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 of today, 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. 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.

Advantages
The process of dematerialization of insurance policies is similar to that of dematerialization of shares and other financial products. However, the essential difference is that in the case of stocks, Demat accounts allow individuals to buy and sell shares, whereas insurance holders are not permitted to do so with their accounts. The Demat insurance account will provide a one-stop window for policyholders to view all their insurance policies like life, motor, health, etc. All transactions and documents of any type of policy 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 at 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 the insurance policy in safe custody would no longer be required. Policyholders would be informed about all their transactions and premium payments 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 fraud.

Way forward
With digitized insurance policies, banks will find it easy to give loans against such a policy. Also, eventually, dematerialization 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 consideration much before the maturity of the policy. Further, with e-insurance accounts, the chances of agency fraud could be less.