Microinsurance as a Tool to Reduce Vulnerability Due to Costs of Ill-Health

This paper discusses the financial vulnerability of poor households in Nepal and how microinsurance can reduce this vulnerability.

Nepal’s policy to provide free primary care to the poor is a positive step. But the poor would still have to pay for services not covered under this policy. Currently, poor households finance health expenses out of their income, savings and through borrowing. Insurance could act as the solution to this problem, by using a solidarity mechanism to spread costs of illness over many households, thus reducing the burden on the affected household.

Insurance converts unpredictable health expenses into predictable costs, making financial planning easier and reducing the need to borrow in emergency situations. To make insurance attractive to the poor, it is important to:

• Design user-friendly insurance processes;
• Overcome user information asymmetry through social penalties or a local community-based mutual insurance scheme;
• Control fraud and moral hazard on the provider side by using tight quality control and information technology;
• Make the insurance product affordable;
• Develop trust among users;
• Develop products that respond to the needs of the target population.