Adverse Selection and Scaling up Process of Voluntary Health Insurance Coverage in India: A Rational Behavior Model of Insurance Agents under Information Asymmetry

Presenter: Sukumar Vellakkal, Indian Council for Research on International Economic Relations

Abstract

Rationale:

The underlying reasons for the low level of health insurance penetration in India are mostly under-explained and the present study is an attempt to analyze some of the plausible reasons.

Objective:

This study examines the determinants of the scaling up process of health insurance by modeling the rational behavior of Insurance Agents who are facing a trade-off between selling ‘health insurance’ and ‘other forms of insurance’ subject to his limited time and efforts and the implications of such a rational behavior on Adverse Selection and Equity.

Methodology:

The study considers the case of private health insurance coverage in India. After examining the nature of adverse selection problem pertinent to the Indian insurance market, the study derives various pre-conditions that affect the rational behavior of Insurance Agents. The study also makes a humble attempt to define two new concepts called ‘Insurance Habit’ and ‘Asymmetric information on Health Insurance Schemes’. Thereafter, the theoretical model on the rational behavior of Insurance Agent is presented. Further, the study examines various strategies of Insurance agent for maximizing his income and its implications on scaling-up of health insurance, adverse selection and equity. The theoretical model is empirically validated by applying a binary probit model and the primary data collected by the author is used in this regard. Both the insured as well as un-insured households were interviewed and peer group discussions were conducted among the Insurance Agents.

Findings:

1) Promoting ‘other forms of insurance’ over health insurance is profitable for an Insurance Agent. However, due to official compulsions and competition, they also opt to sell health insurance and adopt an optimum strategy for this.

2) The level of insurance awareness among the general public is very low and Insurance Agents are the main source of information on insurance schemes. Further, Insurance agents have comparative informational advantage on both the features of health insurance schemes and the health risks of the prospective clients. These all enable Insurance Agents to act as a dominant entity in Insurance market and to adopt an optimum strategy for maximizing his income by 1)reducing adverse selection 2)selling health insurance to high income people and 3)selling health insurance as a complementary product to those who have ‘other forms of insurance’ (those with high ‘insurance habit’) .

3) The probit model reveals that 1) there is no adverse selection, 2) high income people are more likely to have health insurance, and 3) people who are having ‘other forms of insurance’ are also more likely to have health insurance.

Conclusions:

The study concludes that given the existing incentive systems in the Indian Insurance market for promoting various forms of Insurance, the low level of insurance awareness among the general public coupled with the dominant role of Insurance Agent in the market result in a situation of 1) low level of health insurance in-take, 2) No Adverse Selection and 3) Inequity in health insurance coverage. Government intervention is highly recommended to overcome the hurdles to scale-up health insurance in India.