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. Although necessary to reduce costs and reach wide scale, this trend opens microinsurance markets to potential problems from information asymmetry. We use a large data set from a Mexican bank that offers a life insurance policy to its borrowers at a single rate. We exploit an exogenous determinant of insurance purchase to test for systematic use of private information by potential insurance clients. We find evidence of strategic behavior on the part of borrowers stemming primarily from insurers not using available borrower information but no evidence that individuals are acting systematically on information unobservable to the insurer. Our results provide robust evidence that individuals’ behavior in a life microinsurance market is not driven by private information, although theory predicts that this market should strongly suffer from information asymmetry. In addition, our findings have policy implications for the design of microinsurance products and for increasing financial access in developing countries.