Many people in Africa, Asia, and Latin America live without effective protection against existential risks such as illness, invalidity, and inability to work. Therefore, illnesses and accidents can run families into deep poverty. This project investigated alternative forms of health insurance for poor households and, in doing so, combined the analysis of critical problems of insurance markets—such as adverse selection and moral hazard—with the empirical analysis of the effects of insurance on health, visits to doctors and hospitals, child labour, smoothing of the consumption, and migration. The long-term goal of the analysis series was and remains to develop better health insurance models for poor sections of the population in compliance with the financial sustainability. The project was based on a large-scale controlled trial (Randomized Controlled Trial, RCT) in more than 500 villages in Pakistan. The project design did not only avoid selection bias but also allowed for investigating externality in the acquisition of insurances as well as behavioural changes and their consequences.
The research project was completed and a research paper has been submitted for publication (available as IZA Discussion Paper 11751): Adverse Selection in Low-Income Health Insurance Markets: Evidence from a RCT in Pakistan. In this paper, we present robust evidence on the presence of adverse selection in hospitalization insurance for low-income households. A large randomized control trial from Pakistan allows us to separate adverse selection from moral hazard, to estimate how selection changes at different points of the demand curve, and to test simple measures against adverse selection. The results reveal substantial selection in individual policies, leading to welfare losses and the threat of a market breakdown. Bundling insurance policies at the household or higher levels almost eliminates adverse selection, thus mitigating its welfare consequences and creating the possibility to supply sustainable insurance.
