The Insurance Regulatory Development Authority of India (IRDAI) has mandated that all insurance policies will be dematerialised. This could become applicable for new policies by the end of this calendar year, and for existing policies by the end of 2023. Most of us are familiar with the term dematerialised, and familiar with its features and advantages, having seen it already in the share market.
Although the dematerialisation of insurance policies was not implemented so far due to operational challenges and cost concerns, all stakeholders are expected to welcome it in unison, considering its benefits. Let us refresh the concept of insurance dematerialisation before examining the various aspects of it.
Insurance dematerialisation will result in the conversion of physical insurance copies to digital documents. All new insurance policies will, by default, be shared in a demat form. An e-insurance account (eIA) will be the account where all the insurance policies of a person will be kept digitally, much like how demat account stores or shareholdings. To enable this implementation, there will be repositories for dematerialised insurance policies. NSDL, CDSL, Karvy and CAMS are likely to enable this insurance dematerialisation.
Let us straightaway have a look at how various stakeholders will benefit from insurance dematerialisation.
Policyholders – Presently policyholders are managing their insurance policies physically and individually. Dematerialisation will make all their policies available on one platform and at the click of a button. With the eIA, the policyholder can view their insurance portfolio which will include life insurance, health insurance, vehicle insurance and other general insurance policies.
Servicing their insurance policies will now be easier for policyholders as they can do it in one go rather than approaching their insurers. Besides, once the insurance policies are in demat form, they can easily apply for a loan with the policy maturity amount as collateral. The borrowing process is likely to be as simple as borrowing against your demat account holdings.
At the beginning of this year, it was reported that LIC alone has unclaimed funds of over Rs 21,500 crores waiting to be disbursed. A demat account of policies is expected to do away with such situations where the surviving family is unaware of the existence of a life policy purchased by a deceased family member.
Although it may sound insignificant, insurance companies will save money and effort on printing and delivering policies. In the financial year 2021-22, three crore life insurance policies were sold, while non-life policies for the same period amounted to 50 crores. Besides, there are over 30 crore active life insurance policies that will eventually get converted to demat form. Dematerialisation of insurance policies will benefit insurers with the operational ease in managing these policies.
Dematerialisation will also make claim requests more transparent for insurance companies. As in the case of any process, digitisation will restrict instances and attempts of fraud in the insurance sector. With policies digitally available to the policyholders, renewal ratios are expected to improve. This would boost revenues which were otherwise lost in case of untraceable or unaware policyholders.
We have already mentioned the sales volume in the insurance industry during the last financial year. The demat cost of a single policy is estimated to be somewhere between Rs 50 and 60. For the repositories, this indicates an additional revenue potential of Rs 2,650 crore – Rs 3,180 crore in a year as per existing policy sales. Add to that the 30-crore active life insurance policies, which at the same demat cost could generate another Rs 1,500-1,800 crores. This will, however, be a one-time income.
Notably, the combined current revenue of NSDL, CDSL and CAMS for the FY22 was Rs 2,354 crores. Thus, financially, repositories can turn out to be the major winners in insurance dematerialisation.
Dematerialised policies will facilitate improved control and monitoring of the sector and its activities. As the regulatory watchdog, IRDAI will be able to oversee the activities of the sector using a single dashboard. Life insurance premium receipts in India are likely to break the $100 billion ceiling in the coming days. Considering the ever-expanding operational scale, such streamlining is important for the regulator.
Opening the e-insurance account will be free of cost for the policyholders. No charges are anticipated for maintenance or modifications in the eIA as well. The process of dematerialisation will start with the purchase of every new policy from now onwards.
Existing policyholders can get their physical insurance copies converted into a dematerialised form. To do so, the following simple steps need to be followed,
To open the e-insurance account, you will have to appoint an Approved Person (AP). An AP is a point of sale appointed by the insurance repository to work on their behalf. The eIA application form and the KYC documents are submitted to the AP.
The eIA holder must appoint an authorised representative as a part of the account opening formality. This representative will have access to the eIA in the event of the death of the account holder, or the person’s incapacity to access the eIA. The authorised representative is a custodian of the eIA and acts as the messenger of the nominee. Thus, the authorised representative and the nominee are two different entities. The authorised representative enjoys no financial benefits and has limited access after the demise of the account holder.
As mentioned above, making changes in an e-policy will be much easier for policyholders. For policy servicing, the eIA holder must place a request to the insurance repository, which will forward it to the concerned insurer. The approval of such a change request must be done by the insurer. Only after such approval, the policy servicing request will take place.
Dematerialisation will bring in more transparency and security around policies and eliminate frauds and unclaimed funds. It seems apparent that dematerialised policies will streamline the insurance sector. Therefore, it is no surprise that this initiative is being welcomed by all stakeholders involved in the insurance industry.