Asymmetric Information in Microinsurance Markets: Experimental Evidence from Mexico

Abstract

Microinsurers strive to simplify products and their pricing, a trend that runs counter to the customization and complex underwriting of insurance in richer markets. While necessary to reduce costs and reach wide scale, this trend opens microinsurance markets to problems of information asymmetries. We use a large dataset from a Mexican bank that offers a life insurance policy to its borrowers at a unique rate. We exploit an exogenous determinant of insurance purchase to test for systematic use of asymmetric information. We find evidence of strategic behavior on the part of borrowers stemming primarily from insurers not using available client information. This is contrary to the conventional asymmetric information problem which rest on self-selection based on unobservable characteristics. In addition to providing evidence about asymmetric information in a new insurance market, this research has policy implications for the design of microinsurance products and for increasing financial access in developing countries.