Mumbai: Buyers of life insurance will now be able to save their policies in a digital form instead of having to maintain paper copies of each transaction over the life of the policy, which typically spans between 20 and 30 years.
The Insurance Regulatory and Development Authority (Irda), the industry watchdog, is awaiting a proposal from the Life Insurance Council, an industry lobby, that will allow life insurers to dematerialize life insurance policies, just like company shares.
“Once the recommendations come to us, we will approve it,” said a senior Irda official, who did not want to be identified. “Insurance policies in demat form will help in smoother expansion of the industry, lower distribution costs, and higher transparency regarding benefit illustrations and costs involved for a policyholder.”
A 12-member committee of the Life Insurance Council is expected to submit these recommendations to Irda next month, said S.B. Mathur, the council’s secretary general.
Dematerialization (demat) means holding an investment in an electronic form, rather than in a physical form. Two depositories—National Securities Depository Ltd (NSDL) and Central Depository Services (India) Ltd (CDSL)—collectively hold and manage all demat accounts in the country.
The Life Insurance Council committee is checking if the technology available at NSDL and CDSL is suitable, and if all required information related to the different types of life policies can be handled by the depository houses.
Currently, at least 16 million investor accounts are collectively managed by the two depositories. Even if a quarter of the 50 million policies sold during the fiscal year ended March 2009 are issued in demat form, it would mean almost doubling the number of accounts at the depositories.
One of the key benefits of a demat form for insurance will be the ready disclosure of all policy-related information, including commissions and fees paid to the company, exact benefits offered, premium payment and renewal-related dates, and terms and conditions of risks covered.
A number of customers buy insurance without knowing enough about the commissions paid and terms of risk cover, leading to mis-selling, a phenomenon that experts say has led to an unnaturally high rate of lapsed policies.
For insurers, demat will significantly save distribution costs.
“Typically, a company incurs (a cost of) Rs20 per policy, merely as paperwork and distribution costs,” said Mathur of Life Insurance Council. “Fifty million policy sales would simply mean costs of nearly Rs100 crore for the industry.”
A total of 23 life insurers in India had sold at least 300 million policies that commanded a total premium of Rs2.21 trillion at the end of March 2009. The industry sold 33.8 million policies during the nine months to December 2009, and is expected to grow at 15-20% during the fiscal year ending March 2011.
According to Irda official cited in the first instance, at least 25% of policies sold by the country’s largest insurer, Life Insurance Corp. of India (LIC), are expected to mature in the near future.
“Many of these policies were sold to customers in rural and semi-urban areas, who often find it difficult to preserve policy documents and provide them when claiming their sum assured,” the official said. According to Mathur, around 20% of new policies last year were sold in rural areas.
When a claimant fails to provide policy documents, the insurer issues an indemnity bond against the beneficiary and puts out a notice regarding the maturity of the policy and its beneficiary in a national newspaper.
If no one else shows up within three weeks of the notice being published, the sum assured is credited to the first claimant. This process involves further costs.
Bringing such life insurance under the demat regime might mean some regulatory changes, said Paresh Parasnis, principal officer and executive director of HDFC Standard Life Insurance Co. Ltd.
“We have the required infrastructure in place,” Parasnis said. “But practically, all policies have different terms and conditions. Policyholders often avail loans against their policies, which involves banks. The attempt is to bring all aspects of the policies under one system of the depositories.”