This research is part of the project “Role of Small-Scale Finance in Rural Development: Rural Finance and Microfinance” undertaken at the Institute of Developing Economies (IDE-JETRO). The authors are grateful to an anonymous referee for useful comments and discussion. The opinions expressed and arguments employed in this paper are the sole responsibility of the authors and do not necessarily reflect those of IDE-JETRO.
WHY IS THE TAKE-UP OF MICROINSURANCE SO LOW? EVIDENCE FROM A HEALTH INSURANCE SCHEME IN INDIA
Version of Record online: 11 MAR 2010
© 2010 The Authors. Journal compilation © 2010 Institute of Developing Economies
The Developing Economies
Special Issue: THE ROLE OF MICROFINANCE IN RURAL FINANCE: EVIDENCE FROM INDIA AND INDONESIA
Volume 48, Issue 1, pages 74–101, March 2010
How to Cite
ITO, S. and KONO, H. (2010), WHY IS THE TAKE-UP OF MICROINSURANCE SO LOW? EVIDENCE FROM A HEALTH INSURANCE SCHEME IN INDIA. The Developing Economies, 48: 74–101. doi: 10.1111/j.1746-1049.2010.00099.x
- Issue online: 11 MAR 2010
- Version of Record online: 11 MAR 2010
- First version received April 2009; final version accepted November 2009
Insurance for the poor, called microinsurance, has recently drawn the attention of practitioners in developing countries. There are common problems among the various schemes: (1) low take-up rates, (2) high claim rates, and (3) low renewal rates. In the present paper, we investigate take-up decisions using household data collected in Karnataka, India, focusing on prospect theory, hyperbolic preference, and adverse selection. Prospect theory presumes that people behave in a risk-averse way when evaluating gains but in a risk-loving way when evaluating losses. Because insurance covers losses, the risk-loving attitude toward losses might explain the low take-up rates, and we find weak empirical support for this. Households with hyperbolic preference were more likely to purchase insurance, consistent with our theoretical prediction of demand for commitment. We also find some evidence on the existence of adverse selection: households with a higher ratio of sick members were more likely to purchase insurance.