Why Is the Take-up of Microinsurance so Low? Evidence from a Health Insurance Scheme in India

Insurance for the poor, called microinsurance, has recently drawn the attention of practitioners in developing countries. However, there are common problems among the various schemes: (1) low take-up rates, (2) high claim rates, and (3) low renewal rates. In this paper, we investigate take-up decisions using household data collected in Karnataka, India, especially 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. Since insurance covers losses, the risk-loving attitude toward losses may 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.