Do Micro Health Insurance Units Need Capital or Reinsurance? A Simulated Exercise to Examine Different Alternatives

This article presents a technical discussion of capital-loading that micro health insurance units (MIUs) must add to the premium to maintain financial sustainability. The paper examines the 2001 data set of a health insurer containing over 1.3 million insured, breaking the data into 535 “virtual MIUs”. The article states that:

• Price of premium limits the extension of health insurance in low-income countries;
• Premium reflects aggregate risk borne by the insurer;
• Insurance premiums also include capital-loading and loading for administration;
• Loading promotes a perception that insurance premiums prioritize profits of rich insurers over protection of poor clients;
• Understanding capital-loading in insurance premiums can contribute to acceptance of insurance practices.

The study finds that capital-loading levels increase steeply with decreasing group size and higher confidence levels. Group size continues to impact capital-loading levels strongly, even with groups larger than 25,000.The article discusses options to correct size-related premium bias through government subsidies. It concludes that reinsurance is not only a cheaper, but also a preferable solution for governments compared to other alternatives.