Why the Poor are Underinsured - A Case Study on Microinsurance in South-East India

Abstract

This paper investigates the reasons for underinsurance of the poor in south-east India. Based on data gathered during a six week assignment in Tamil Nadu, India, we analyse which factors have so far hindered the development of a market for microinsurance. Apart from a theoretical analysis, our study is based on field work during which we collected 248 questionnaires, 40 in-depth interviews with low income women and many expert interviews. We in turn test the hypotheses that the market for microinsurance is impeded by (1) transaction costs, (2) adverse selection, moral hazard and fraud, (3) lack of scalability, (4) ill-suited products offered or (5) lack of risk aversion, information, understanding and rationality. We reject the first four hypotheses and find that insurers and NGOs in cooperation can and already have reduced transaction costs, adverse selection, moral hazard and fraud to levels which make microinsurance feasible. Further we find that the products currently offered by Indian insurers are commensurately scalable (with the exception of health insurance) and offer significant risk reduction potential to low income clients, indicating that the products offered are not ill-suited to the clients’ needs. However, we find evidence that, although risk averse, the target population for microinsurance products is widely unaware of microinsurance availability, lacks financial literacy and understanding of basic insurance concepts and shows irrational or bounded rational behaviour impeding the demand for microinsurance. Hypothesis 5 can thus not be rejected.