Details Matter: Why Isn't Insurance More Popular?

Poor households face large amount and diversity of risks. Living in poverty typically means not only living with a low income, but also an irregular one, and having often ill-adapted and incomplete tools to deal with these challenges. Formal insurance products designed for poor households could theoretically provide critical protection against high-impact events that can push a household deeper into poverty, or send it back into poverty when it manages to lift itself up. Such events are numerous, from the sickness of the household’s main income earner, to a drought destroying en entire harvest, or the death of a family member.

Despite what is perceived as a large need, take-up rates of microinsurance products remain low overall, and what drives microinsurance demand is not well known. In Africa, for example, Matul et al (2010) find that 2.6 percent of the population living with less than $2 per day uses microinsurance. Cole et al (2011) study demand for a rainfall insurance product in India, in regions where households cited droughts as the most significant risk they face. Yet take-up was only between “close to zero” and 29 percent of households, depending on product characteristics and marketing techniques.

Practitioners and researchers alike are hard at work trying to understand causes of these low take-up rates. Recent research is reviewed in a December 2011 note by CGAP and partners from IPA, J-PAL and FAI (Bauchet et al 2011). Latest Findings from Randomized Evaluations of Microfinance considers issues of take-up as well as impact, but in this blog post I’ll focus on findings about the take-up of microinsurance products, and how product design can help increase it.

One obvious determinant of low take-up of microinsurance products is that the price may be too high. The sensitivity of insurance demand to price is indeed high, and product offers including subsidies have seen purchase rates increase. Xavier Giné and several co-authors (2010) calculated that a 10% decrease in the price of rainfall insurance in India increased take-up by 6.6 to 8.7 percentage points. Prices, however, are hard to lower given current product distribution systems and the costs of providing microinsurance.

Even at an actuarially fair price (the price that covers average payouts, but not the costs of administering the product), however, Dean Karlan and co-authors (forthcoming) found that less than half of potential clients decide to purchase insurance. Price is not the only determinant of take-up. Several other reasons have been studied in the literature. Clients’ and potential clients’ perception of the value of microinsurance products is key. It depends both on product characteristics and clients’ perceptions, and may be lower or different than what the microinsurance community thinks (see a brief by the Microinsurance Learning and Knowledge project (MILK 2012) for various possible reasons why that may be).

New, innovative insurance products carry high hopes for expanding insurance offerings and take up. “Index” insurance products rely on public events to trigger payouts, rather than clients’ reporting a loss and starting a costly and typically lengthy claim verification process. Common examples include rainfall insurance, hospital insurance, or natural disaster insurance. Rainfall insurance contracts pay clients in case of too much or too little rainfall, as observed in a local weather station. Hospital insurance (products are often called “hospital cash”) covers households against the costs incurred when being hospitalized for more than a given number of days. Natural disasters being highly visible events, claims can be paid out with a small verification process.

Index insurance products are particularly interesting for insurers, because they reduce or eliminate moral hazard and adverse selection problems. In addition to being simpler and cheaper to administer, such products could also be simpler to understand by potential clients, thereby raising their attractiveness. Big innovations, such as index insurance, as well as details of product design, distribution channels and marketing techniques matter to make microinsurance interesting and useful for poor households.