Understanding and Information Failures: Lessons from a Health Microinsurance Program in India

This paper is an attempt to understand the factors underlying the low take up and contract renewal rates frequently observed in insurance programs in poor countries. This is done on the basis of the experience of a microinsurance health program in India. We show that deficient information about the insurance product and the functioning of the scheme, poor understanding of the insurance concept, and the resulting low use of the insurance products by eligible households are the major causes of the low contract renewal rate among the households which has previously enrolled into the program. A particularly interesting finding is that, when a household has received a negative payout during the preceding year (the cost of the premium has exceeded the insurance benefits), it is more inclined to renew its participation if it has a better understanding of what insurance exactly means (a redistribution between lucky and unlucky individuals). Such a finding strongly suggests that the understanding failure is a key problem in attempts to provide insurance to poor people, and this problem is obviously more difficult to overcome than the largely supply-driven information failure. That economists have neglected the role of the understanding failure is apparent from the lack of attention to this aspect in recent theories aimed at improving our knowledge of human behavior toward risk. Another central, policy-relevant finding of the study is that participation in previously constituted self-help groups has the effect of enhancing both the insurance take up and contract renewal rates. This points to the essential role of non-governmental organizations that operate at the grassroots level.