Risk-revealing contracts for government-sponsored microinsurance

Microinsurance products are designed primarily to address the needs of low-income individuals and households in the developing world. Given the small premium volumes and slight profit margins of microinsurance, insurers generally cannot sustain high underwriting costs. In the present work, we propose a practical method for a government monopoly to reduce problems of adverse selection in microinsurance through risk-revealing contracts. We then apply this methodology to China's Urban and Rural Residents' Basic Medical Insurance (URRBMI) system, a voluntary, microinsurance monopoly whose lack of underwriting procedures makes it vulnerable to adverse selection. Historical provincial-level data from the New Cooperative Medical Scheme, a predecessor of the URRBMI, are used to illustrate the proposed approach.