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Cognitive Bias in Insurance: Evidence from India

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  • Ontiveros, Darwin Ugarte
  • Platteau, Jean-Philippe

Abstract

This paper is an attempt to understand the factors behind low contract renewal rates frequently observed in insurance programs in poor countries. This is done on the basis of the experience of a micro-insurance health program in India. We show that poor understanding of the insurance concept, compounded by a serious supply-side information failure, is a major cause of low contract renewal among households which had previously enrolled into the program. Controlling for the level of their information about how to collect the insurance payout, households that did not experience a health shock during the first year tended to pull out of the scheme when they are subject to a cognitive bias reflected in short-term framing. When they are classic expected utility maximizers, however, the absence of a health shock did not affect their contract renewal decision. The policy implication of our findings is considerable since they provide a strong justification for mandatory universal health insurance.

Suggested Citation

  • Ontiveros, Darwin Ugarte & Platteau, Jean-Philippe, 2017. "Cognitive Bias in Insurance: Evidence from India," CEPR Discussion Papers 12242, C.E.P.R. Discussion Papers.
  • Handle: RePEc:cpr:ceprdp:12242
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    More about this item

    Keywords

    cognitive ability; health economics; information failure; Insurance; myopic behavior; non-governmental organizations;

    JEL classification:

    • D01 - Microeconomics - - General - - - Microeconomic Behavior: Underlying Principles
    • D03 - Microeconomics - - General - - - Behavioral Microeconomics: Underlying Principles
    • I13 - Health, Education, and Welfare - - Health - - - Health Insurance, Public and Private
    • O12 - Economic Development, Innovation, Technological Change, and Growth - - Economic Development - - - Microeconomic Analyses of Economic Development
    • O16 - Economic Development, Innovation, Technological Change, and Growth - - Economic Development - - - Financial Markets; Saving and Capital Investment; Corporate Finance and Governance

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