Insurance doesn’t need ‘demat’

It is reported that big-bang reforms are set to take place in the insurance industry, and one of the reforms contemplated is introduction of dematerialised policies. One fails to understand the rationale behind dematerialisation for insurance policies.

Already, dematerialisation has been permitted for shares and bonds and it has become compulsory to have shares in demat form for trading on stock exchanges. When it was introduced for shares, it was welcomed by all.

It has eliminated bad deliveries and risks associated with physical certificates. No stamp duty is payable now on share transfers. It has enabled a faster settlement cycle of T+2 and faster disbursement of rights and bonus benefits. Immediate transfer and registration of stocks has become possible. There is reduction in brokerage fees paid and also reduction in handling of huge volumes of paper certificates. One nomination for a demat account can cover all the share holdings of various companies and changes in nomination can be done easily to cover all the holdings. This has paved the way for new products such as three-in-one account: linking brokerage, demat and bank accounts which can be operated through Internet.

no rationale

All the above are fine for a share or a bond. But how do these benefits apply to an insurance policy?

An insurance policy is not going to be transferred to anyone. It is not traded in the market. Even in case it is given as security for a bank loan, the existing procedure of marking assignment on the policy is not difficult. Moreover, marking assignment or removing assignment is a one-time affair and even in demat format this has to be done in a different way. There is no question of any additional benefits like rights issue, bonus issue, dividend payment, etc., for an insurance policy. Insurance is not part of the capital or debt and the insurance policy is not something to represent debt or share capital given to the insurance company. It is only a contract between the insurance company and the policyholder and one fails to understand why it should be in demat form.

Supporters have argued that demat policies will enable consumers to get their policies serviced anywhere and allow a one-time know-your-customer process. But these are possible even now without dematerialisation. The only requirement is linking all the insurance data among companies as the banks have done through core banking solution.

No risk perceived

Some have said that demat will eliminate the risk of holding the physical policies for 20 or 30 years. Holding the policy is not at all cumbersome and, in fact, many find it secure to have them in the physical form, whereas keeping it in demat form involves cost of payment to the depository every year. There is another option of keeping it in a safe-deposit locker available to policyholders.

Thus, dematerialisation should not be thrust upon policyholders and it should be left to their discretion. Policyholders expect better return on their investment, timely service and claims settlement. Rather, they are more concerned when the Government uses up the surplus of the Life Insurance Corporation, which pulls down their bonus earnings. One also wonders why no initiative has been taken by the Government to dematerialise property holdings in this country, which is the need of the hour. At least on a pilot basis in one district of each state this can be introduced. It is quite possible that dematerialisation can be attempted for vehicle ownership also instead of physical registration certificate.

(The author is a retired banker.)

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