MICROINSURANCE PAPER No. 29

Transcription

1 Implemented by MICROINSURANCE PAPER No. 29 January 2014 USING SUBSIDIES FOR INCLUSIVE INSURANCE: LESSONS FROM AGRICULTURE AND HEALTH Ruth Vargas Hill*, Gissele Gajate-Garrido*, Caroline Phily^ and Aparna Dalal^ * International Food Policy Research Institute ^ ILO s Microinsurance Innovation Facility

2 MICROINSURANCE PAPER No. 29 Copyright International Labour Organization 2014 First published 2014 Publications of the International Labour Office enjoy copyright under Protocol 2 of the Universal Copyright Convention. Nevertheless, short excerpts from them may be reproduced without authorization, on condition that the source is indicated. For rights of reproduction or translation, application should be made to ILO Publications (Rights and Permissions), International Labour Office, CH-1211 Geneva 22, Switzerland, or by pubdroit@ilo.org. The International Labour Office welcomes such applications. Libraries, institutions and other users registered with reproduction rights organizations may make copies in accordance with the licences issued to them for this purpose. Visit to find the reproduction rights organization in your country. ILO Cataloguing in Publication Data Vargas Hill, R.; Gajate-Garrido, G.; Phily, C. and Dalal, A. Using subsidies for inclusive insurance: Lessons from agriculture and health / Vargas Hill, R.; Gajate-Garrido, G.; Phily, C. and Dalal, A. International Labour Office. - Geneva: ILO, p. (Microinsurance paper ; no.29) ISBN: (web pdf) International Labour Office Key Words - microinsurance / subsidies / health insurance / agriculture insurance ILO Cataloguing in Publication Data The designations employed in ILO publications, which are in conformity with United Nations practice, and the presentation of material therein do not imply the expression of any opinion whatsoever on the part of the International Labour Office concerning the legal status of any country, area or territory or of its authorities, or concerning the delimitation of its frontiers. The responsibility for opinions expressed in signed articles, studies and other contributions rests solely with their authors, and publication does not constitute an endorsement by the International Labour Office of the opinions expressed in them. Reference to names of firms and commercial products and processes does not imply their endorsement by the International Labour Office, and any failure to mention a particular firm, commercial product or process is not a sign of disapproval. ILO publications and electronic products can be obtained through major booksellers or ILO local offices in many countries, or direct from ILO Publications, International Labour Office, CH-1211 Geneva 22, Switzerland. Catalogues or lists of new publications are available free of charge from the above address, or by pubvente@ilo.org Visit our website: June 2011 i

3 MICROINSURANCE PAPER No. 29 CONTENTS Contents...ii Acknowledgements...iii List of boxes...iv List of Tables...iv List of figures...iv Executive Summary...v Lessons for governments...v Abbreviations and acronyms...vii 1 > Introduction > Framework...8 Rationale for subsidies...8 Type of subsidies...9 What is a smart subsidy? > Promoting equity: Extending coverage to the excluded...11 Introduction...11 Increasing insurance coverage among poor households...11 Lessons on implementing premium subsidies...15 Summary > Overcoming market inefficiencies...20 Removing information asymmetries to improve availability of data and reduce adverse selection and moral hazard...20 Addressing externalities by improving knowledge of insurance...25 Reducing high fixed costs > Lessons in financing subsidies and controlling costs > Conclusion > References > Appendix: Examples of subsidized microinsurance schemes, by type of subsidy...44 ii

4 MICROINSURANCE PAPER No. 29 ACKNOWLEDGEMENTS This paper has benefited from the contributions, insights and thoughts of many experts, including Kwasi Boaene, Richard Choulartan, Daniel Clarke, Adelio Fernandes, and Nishant Jain. The authors also appreciate the detailed comments on previous drafts provided by a number of reviewers, including Craig Churchill, Daniel Clarke, Thomas Wiechers and members of the Microinsurance Network working groups, including Roland Steinmann, Mark Wenner, Thierry Van Bastelaer, and Veronique Faber. They also thank Camyla Fonseca for her valuable research support. This study was partly funded by the German Federal Ministry for Economic Cooperation and Development (BMZ), which promotes insurance approaches within comprehensive systems of social protection and inclusive financial systems. iii

5 MICROINSURANCE PAPER No. 29 LIST OF BOXES Box.1. A note for policymakers: Why subsidize insurance? Box 2. Using insurance to increase poor people s access to health care: The case of Ghana Box 3. Using insurance to increase the use of health-care facilities in Cambodia Box 4. HARITA/R4 Box 5. Supporting private weather insurance markets in India Box 6. On the importance of a strong monitoring system to control costs in social health insurance Box 7. Using subsidies to test insurance and create demand: The case of Nigeria Box 8. Pricing the premium according to actuarial data Box 9. Subsidizing microinsurance through risk-layering in Mongolia Box 10. On the importance of a clear exit strategy or long-term financing strategy: The case of Ghana LIST OF TABLES Table 1. Summary of case studies Table 2. Targeting subsidies Table 3. Subsidies in agricultural and health microinsurance schemes: Summary of key lessons LIST OF FIGURES Figure 1. Framework for using subsidies in microinsurance Figure 2. Elements of a smart subsidy Figure 3. Price elasticity of demand for crop index insurance in different countries iv

6 MICROINSURANCE PAPER No. 29 EXECUTIVE SUMMARY Insurance lies at the intersection of financial inclusion and social protection, and can contribute to a number of public policy objectives, including improving access to health care, increasing food security, and coping with climate change. There is therefore a public policy rationale to invest in the development of efficient insurance markets that provide equitable access to low-income households. Providing subsidies for insurance is a common practice of many governments and donors, especially to ensure access to health care and secure farmers revenue, in countries with a high percentage of rural workers. Smart subsidies are designed and implemented in ways that provide maximum social benefits while minimizing distortions in the market and mis-targeting of clients. Poorly designed subsidies can undermine efficiencies and incentives within the insurance industry, and encourage over-utilisation of health care by beneficiaries, and overinvestment in risky, and sometimes environmentally damaging, agricultural activities. A subsidy should be designed with a clearly stated and well-documented purpose. It should address a market failure or equity concern, and should successfully target those in need with minimum inefficiency. Smart subsidies are designed with a clear exit strategy or with a long-term financing strategy in mind. Additionally, a good monitoring and evaluation system that tracks the performance of subsidies is paramount for the success of any subsidized insurance scheme. Lessons for governments The evidence from the nine subsidized agricultural and health insurance schemes provides insights on how best to subsidize in order to effectively address the rationale at the heart of the subsidy. The lessons are organized into two main objectives: reduce market inefficiency and promote equitable coverage. Overcome market inefficiencies: Making insurance cover mandatory is one of the most effective ways to address adverse selection in health insurance markets, but premium subsidies may have to be offered to help individuals pay for the cover. Investment in publicly funded care for contagious diseases and chronic conditions is a good way to address externalities and adverse selection in health insurance markets. Insurance literacy efforts will not necessarily result in higher demand. There is a role for learning by doing, but more importantly products need to offer good value. Price incentives used in the short run to help people experience and learn about the value of insurance need to be explicit (e.g. time-sensitive vouchers) rather than hidden (i.e. lower insurance premiums). Enabling people to learn from experience in this way is likely to be more useful for health insurance, which pays out to a few individuals regularly, than for agricultural insurance, which pays all policyholders but infrequently. Investment in information systems, start-up costs and reinsurance can encourage the development of the microinsurance market as some of the main costs faced by starting schemes are reduced. Reinsurance support is best provided through ex-ante planning rather than ex-post financing. Planning upfront can limit the Government s exposure to risk and avoid the failure of the scheme due to the lack of funds. Investment in technology, data collection, monitoring and evaluation and training in operations are crucial as they reduce fixed costs and avoid fraud. Promote equitable coverage: Efficient targeting mechanisms are crucial to the success of a subsidized scheme. Otherwise, benefits can go to individuals that don t actually need them or that are not the priority at the v

7 MICROINSURANCE PAPER No. 29 moment. If targeting is difficult, or if a large share of the population is being targeted, then it may be better to provide universal subsidies, targeting the entire population. Premiums must be actuarially priced and based on targeted population experience for health, and on weather and yields for agriculture, to reduce costs. Having actuarially priced premium help better monitor the risk exposure and administrative cost of the scheme. Donor financing for subsidies that aim to improve the equity of coverage is only advisable if there is a plan on how to raise government revenue to finance them in the long run, as they will probably be in place for a long time. Without this long term financial strategy, insurance will be small scale or short-lived or subject to annual fiscal budget negotiations. Cross-subsidies as a form of financing are only effective when certain conditions are fulfilled, such as a large and diverse risk pool and a large percentage of the population working in the formal sector. The reason is that it is difficult to design a contribution system based on income in the informal sector, which can end up by undermining the financial strategy of the scheme. Proportional premium subsidies are better than premium caps as they provide information on relative riskiness. As financial constraints are not the only barrier to demand, governments and donors need to go beyond financial support to increase access. Initiatives such as communication campaigns and support for the registration process are also helpful to increase participation and improve experience. Even when motivated by equity concerns, governments may find it more effective to first invest to address inefficiencies in insurance markets, before considering traditional premium subsidies. Subsidizing inefficient markets through premium subsidies could lead to sustainability challenges in the long-term and hence it is preferable to address market inefficiencies upfront. vi

8 MICROINSURANCE PAPER No. 29 ABBREVIATIONS AND ACRONYMS AFD Agence française de développement AIC Agriculture Insurance Company of India BPL Below the poverty line CBHI Community-based health insurance scheme DMHIS District mutual health insurance scheme GIZ Deutsche Gesellschaft für internationale Zusammenarbeit (GIZ) GmbH HARITA Horn of Africa Risk Transfer for Adaptation HEF Health Equity Fund IBLI Index-Based Livestock Insurance mnais Modified National Agricultural Insurance Scheme (India) NAIS National Agricultural Insurance Scheme (India) NHIA National Health Insurance Authority (Ghana) NHIC National Health Insurance Council (Ghana) NHIF National Health Insurance Fund (Ghana) NHIS National Health Insurance Scheme (Ghana) NHS National Health Scheme (Colombia) HCHP Hygeia Community Health Plan RSBY Rashtriya Swasthya Bima Yojana SSNIT Social Security and National Insurance Trust WFP (United Nations) World Food Programme WBCIS Weather-Based Crop Insurance Scheme vii

9 1 > INTRODUCTION Risks and life-cycle events can affect the well-being of all citizens, especially if they do not have the resources to cope with the financial burden when shocks occur. Policy-makers have used insurance to achieve their objective of maximizing citizens well-being in an equitable way, especially when it comes to ensuring access to health care and, in countries with a high percentage of rural workers, securing farmers revenue. But traditionally, insurance has targeted formal sector workers, as identification and processes have not been adapted for informal workers and small-scale farmers. With recent developments in microinsurance, a financial arrangement to protect low-income people against specific perils in exchange for the payment of premiums (Churchill, 2006), governments and donors could consider how to support the development of microinsurance markets as a mean to protect their population and support economic growth. Insurance provides benefits along three dimensions that align well with policy objectives: (i) financial protection, (ii) access to and use of services such as health care, and (iii) more productive investment due to peace of mind. Insurance ensures that households receive assistance when adverse events strike, hence preventing and reducing poverty (Gertler and Gruber, 2002). Levine et al. (2012) show that health insurance in Cambodia resulted in insured households holding 40 per cent less debt than uninsured households and 70 per cent less health-expenditure-related debt. Access to health insurance also allows households to receive health care when they experience ill health. Hadley (2002) reviews evidence for the United States and suggests that health insurance reduces mortality by between 5 and 20 per cent. In addition to the intrinsic protection benefits of insurance, being insured can provide households with the protection they need to invest in businesses or in preventative health care, which yields long-term growth. In the case of agricultural microinsurance, recent studies have shown that insurance increases expenditure on agricultural inputs (Karlan et al., 2012) as well as investment in high-return activities (Cole et al., 2013; Karlan et al., 2012), resulting in an increase in the average income of insured households. By protecting agricultural investment, microinsurance can also open up credit markets for agricultural lending, allowing farmers to invest further in agricultural production (Carter et al., 2011). In the case of health insurance we have evidence that it produces economic benefits by preventing households from falling into poverty (Gertler and Gruber, 2002; Wagstaff, 2007). Similarly, Mahal et al. (2013) find that insured households made more visits to community health workers for primary care, but spent fewer days in hospital. Hadley s (2002) review of health insurance in the United States suggests that it increased annual earnings by 15 to 20 per cent. Yet even though we know that poor health affects school attendance, child productivity (Miguel and Kremer, 2004) and lab our productivity (for example, Dillon et al., 2013), the evidence on the economic effects of health insurance participation is scarce. To the extent that insurance markets have an intrinsic and economic value, there is a public rationale for investing in the development of insurance markets to make sure that they work efficiently and to provide equitable access (see box 1). Providing subsidies to insurance is a popular practice of many governments and donors (World Bank, 2011). In agricultural insurance, in the middle- and low-income countries surveyed in Mahul and Stutley (2010), public subsidies represented per cent of the premium paid by farmers, and 63 per cent of all countries surveyed provided premium subsidies. In China the agricultural microinsurance market grew to being the second-largest agricultural insurance market in the world in 2008 as a result of government support and subsidies. In India, 35,000,000 households living in poverty now have access to inpatient health care via a publicly subsidized insurance scheme, Rashtriya Swasthya Bima Yojana (RSBY). 1

10 Box. 1. A note for policymakers: Why subsidize insurance? Insurance can contribute to a number of public policy objectives, including improving access to health care, improving food security, and providing a better way to cope with climate change. Insurance lies at the intersection of financial inclusion and social protection. It can be used to extend or complement social protection systems, particularly for workers in the informal economy. Policy-makers can draw on the expertise and capacity of the insurance industry to implement microinsurance schemes that link closely to existing governmental protection systems. Public and private instruments can form an overall system of social protection that is accessible by low-income groups. At the same time, it is possible to bundle insurance with other financial services, like credit, savings and remittances, to increase financial inclusion. Health microinsurance, for example, may be used to provide access to health care and, thereby improve the health outcomes of previously excluded segments of society. That has been the case in Colombia, where the reform introduced by the Government in 1993 resulted in the implementation of a national health insurance scheme that was aimed not only at expanding the limited coverage of the previous social protection scheme, which reached only 15.7 per cent of the population, but also at guaranteeing that the poorest and those employed in the informal sector of the economy could enjoy good-quality health care (Gómez et al., 2013). Agricultural insurance, on the other hand, provides a way of stabilizing agricultural production, ensuring food security and reducing the effects of catastrophic climate change events. This is illustrated by HARITA/R4, a programme launched by Oxfam America and the United Nations World Food Programme (WFP), which, by offering rural households a number of risk management tools, including weather-index insurance, aims to help peasant farmers build resilience to climate change and be prepared for the challenges it presents to their food security and long-term well-being. Governments can also use agricultural insurance to stimulate agricultural productivity. In this sense, it does not only prevent disadvantaged groups from falling into poverty after adverse environmental events, but it may also unleash productive potential: new studies find that low-income farmers invest in riskier but more productive activities if they are insured against climate risks. The possibility of improving production in rural areas may also motivate policy-makers who are trying to reduce unsustainable urbanization. At their best, subsidies help households receive protection through microinsurance that they would not otherwise have; however, at their worst, subsidies undermine efficiencies and incentives within the insurance industry, encourage overspending on health care by beneficiaries, discourage enterprising behaviour and encourage overinvestment in risky, and sometimes environmentally damaging, agricultural activities (as the premium no longer reflects the true risk borne by the insured). In this paper we set out a framework for thinking about how governments and donors could subsidize microinsurance in a way that achieves their policy objectives. We build on a number of studies that show that smart subsidies require a clear knowledge of why subsidies are being provided (Busse, 2002; Mahul and Stutley, 2010). This helps guide the appropriate design and targeting of subsidies, and gives an idea of how long they are needed. In discussion of the framework we focus on agricultural and health microinsurance schemes, as the majority of subsidized schemes are focused on these two areas. We recognize that health and agricultural insurance mechanisms are different, but a number of issues related to the design and implementation of subsidies are similar in both these areas, and many of the lessons discussed in this paper apply them both, as well as to other types of coverage. We focus on insurance schemes that target traditionally excluded individuals (generally from the informal sector) and where the insured holds an insurance policy of some description. As such we include schemes where the insurance is free to the beneficiary as long as the individual is a policyholder (for example, the Colombian national health insurance scheme), but we do not 2

11 consider schemes that are essentially risk-financing mechanisms for government budget expenditure (for example, Agroasemex s insurance of state government budgets in Mexico or risk financing of the Productive Safety Net Programme in Ethiopia). In addition we limit our focus to the financial support provided by governments and donors, rather than considering regulatory concerns. It is important to define clearly what this study does not consider. Insurance is not the only way in which a government can improve the health and economic security of its citizens. Free public health care, for example, can provide households with protection against health-care costs, and safety nets, such as conditional cash transfers or public works schemes that scale up in the event of poor agricultural conditions, can provide households with protection against shocks to agricultural incomes. If citizens have a clear enough contract with the state, such that they know they can rely on the state for a given amount of support in a given contingency, these programmes can have behavioural effects (in terms of increasing health and agricultural investment) similar to those brought about by insurance contracts. The choice between insurance market development and other types of government programme is not one that we address in this paper. Policy-makers ultimately need to know which development programme provides the most social value for the least cost. We recognize that there is a need for cost benefit analysis that assesses insurance in relation to other risk-mitigation tools or to public investment in infrastructure or training. We also acknowledge that insurance alone will not be sufficient to achieve policy objectives: a functioning health-care system needs to be in place for insurance to be of value to the population, as well as access to credit, and training is required for farmers to be productive. The analysis is based on desk research and interviews. Nine case studies are used to exemplify the lessons learned. These include four agricultural insurance schemes HARITA/R4 in Ethiopia, the modified National Agricultural Insurance Scheme (mnais) in India (along with the Weather-Based Crop Insurance Scheme WBCIS and the National Agricultural Insurance Scheme NAIS), private rainfall index insurance in India, and Index-Based Livestock Insurance (IBLI) in Mongolia and five health insurance schemes Health Equity Funds (HEFs)/ community-based health insurance (CBHI) schemes in Cambodia, the National Health Scheme (NHS) in Colombia, the National Health Insurance Scheme (NHIS) in Ghana, Rashtriya Swasthya Bima Yojana (RSBY) in India and PharmAccess and Hygeia Community Health Plan (HCHP) in Nigeria. These schemes are summarized in table 1 and are discussed in further detail in boxes referred to throughout the report. Table 1. Summary of case studies Name of scheme, Description of scheme Rationale for the Type of subsidies Partners involved country, type of (objective, targeted at ) subsidy 1 used scheme (health/agriculture) HARITA/R4, HARITA/R4 offers weather- Equity and Investment in product WFP, Oxfam Ethiopia. Agriculture indexed insurance to poor efficiency (high development, America, Swiss Re, farmers in Ethiopia, who can fixed costs) 2 infrastructure and Rockefeller pay their premiums in cash or technology, Foundation, Relief through labour in irrigation insurance literacy, Society of Tigray, and forestry projects. The premium subsidies International goal is to enable them to Research Institute for build resilience against Climate and Society, shocks and to benefit even Nyala Insurance when there is no insurance Share Company, 3

12 payout. and Oromia Insurance Company, among others Index-Based IBLI is based on an index of Efficiency (high Investment in product Government of Livestock Insurance livestock mortality rates by fixed costs) development, Mongolia, World (IBLI), Mongolia. species, compiled and insurance data, Bank Agriculture maintained by the Mongolian reinsurance National Statistics Office. Herders bear the cost of small losses, while losses of between 6 and 30 per cent are covered through a reserve fund reinsured by the Government, the Livestock Insurance Indemnity Pool (LIIP). Losses exceeding 30 per cent are covered by the Government, which has access to a contingent credit line from the World Bank. National The three crop schemes aim Equity and Reinsurance, premium Government of Agricultural to help farmers stabilize their efficiency (high subsidies India, private Insurance Scheme incomes, particularly in fixed costs and insurance companies (NAlS), Weather- disaster years. Compensation information including Agriculture Based Crop of the loss is assessed under asymmetries) 3 Insurance Company Insurance Scheme the NAIS and the mnais on of India (AIC) and (WBCIS) the basis of yield data ICICI Lombard, and Modified provided by implementing World Bank National states and under WBCIS Agricultural based on weather data Insurance Scheme recorded by automatic (mnais), India. weather stations notified by Agriculture implementing states. Private rainfall index ICICI Lombard, IFFCO-Tokio Efficiency Premium subsidies, Government of insurance (SEWA & and other insurance (externality) 4 investment in training India, SEWA, BASIX, BASIX, IFFCO-Tokio companies are developing and infrastructure IFFCO-Tokio, ICICI & ICICI Lombard, and underwriting different Lombard, AIC AIC & ICICI rainfall index insurance Lombard), India. products, which are then Agriculture marketed and distributed by microfinance institutions and NGOs such as BASIX and SEWA. The aim is to reduce farmers vulnerability to rainfall volatility. 4

13 National Health Scheme (NHS), Colombia. Health Health Equity Funds (HEFs) and SKY programme, Cambodia. Health Colombia has a bifurcated national health insurance system that aims to make health coverage universal. The contributive half covers all employees with formal jobs and self-employed people who earn more than the minimum wage. The poor, indigent, and unemployed are covered by the subsidized half of the programme, which aims to guarantee access to lowincome and vulnerable groups that before were not previously considered by any health scheme in the country. HEFs are a pro-poor healthfinancing scheme that targets identified poor households in a given area and covers the direct costs of health services and medication used by them. SKY is a non-profit community-based health insurance (CBHI) programme implemented by the French NGO GRET since 1998, with the financial and technical support of France and Germany, that targets mainly the near-poor population, with the objective of providing an affordable risk management tool to a population with no access to insurance. By combining the two schemes in one pilot, the goal was to increase efficiency in implementation and improve access to health services for the poor in Cambodia. Equity Premium subsidies National Health Authority, healthpromoting entities and subsidized health-promoting entities (insurance managers and providers) and health-providing institutions (healthcare providers) Equity and Premium subsidies Agence française efficiency and technical de développement (information assistance (AFD the French asymmetries) international development agency), Deutsche Gesellschaft für internationale Zusammenarbeit (GIZ, Germany), AusAid, Second Health Sector Support Program (HSSP2), GRET National Health Insurance Scheme (NHIS), Ghana. The NHIS was established by the Government of Ghana to provide basic health-care Equity Premium subsidies National Health Insurance Council (NHIC), National 5

14 Health services through district Health Insurance mutual health insurance Authority (NHIA) schemes. Through a selective and district mutual premium subsidies system, the health insurance poorest and most vulnerable schemes (DMHISs) are able to have access to health services. PharmAccess and HCHP provides access to Equity and Premium subsidies, Dutch Ministry of Hygeia Community medical care for poor efficiency investment in Foreign Affairs, Health Plan (HCHP), communities in Lagos and (externalities) programme PharmAccess Nigeria. Kwara States by contracting development, Foundation, Health Health health-care providers technical assistance Insurance Fund, through donor-subsidized and capacity Hygeia Community health insurance. The scheme development, Health Care, Kwara targets informal sector monitoring and State workers and people engaged in farming and management having small businesses, in order to increase the penetration of health insurance and improve the quality of health care. Rashtriya Swasthya RSBY offers an inpatient Equity and Investment in Ministry of Labour Bima Yojana (RSBY), health product through efficiency (high technology, premium and Employment, India. private insurance companies fixed costs) subsidies state Governments, Health (selected on the basis of World Bank, GIZ, competitive bidding) to any Indian private family below the poverty line insurance companies (BPL) whose information is included in the district list prepared by the State Government. The goal is to improve health outcomes in the country and reduce the out-of-pocket expenses of the poor. 1 Equitable coverage/equity and efficiency will be discussed in detail in sections 3 and 4. Other terms are defined and explained later in the paper. 2 See section See section 4, first paragraph. 4 See footnote 1. 6

15 In the rest of the paper, we discuss the current evidence on subsidies, based on a literature review and case studies. How much demand does a premium subsidy generate? Do subsidies help poor individuals buy insurance, or does insurance still remain expensive and out of reach? To what extent can subsidies increase the insurance risk pool? To what extent can subsidies reduce adverse selection? Can agricultural and health insurance markets function well if initial entry costs are subsidized? To answer these questions, in section 2, we present a framework for the rationale behind subsidies and we define a smart subsidy. The following two sections look specifically into the two main reasons for subsidies promoting equitable coverage and reducing market inefficiencies: section 3 examines how subsidies can promote equitable coverage, while section 4 explores how market inefficiencies can be overcome. Both these sections discuss the objectives and methods of the subsidies provided in the case study schemes, as well as the achievements and lessons related to them. Section 5 highlights lessons learned from the nine case studies on financing considerations important for designing and implementing smart subsidies. Particular attention is paid to cost control mechanisms. We finally conclude in section 6. 7

16 2 > FRAMEWORK This section lays out a framework for examining the use of subsidies in insurance. The framework helps to analyse the subsidies in terms of their rationale, their duration and the type of subsidy. We also define a smart subsidy. RATIONALE FOR SUBSIDIES When considering developing subsidies for insurance to support policy objectives (see box 1), policy-makers or donors should be clear about the objective they are trying to reach. There are two broad categories of reasons for providing subsidies to insurance. First, subsidies can be used to improve equity of coverage by extending insurance access to previously excluded groups, such as low-income individuals. Second, subsidies can be used to correct market failures that may have hindered the development of the insurance sector. Market inefficiencies such as externalities 1 or high fixed costs may cause underinvestment by insurance companies, and lack of information and awareness among clients may lead to information asymmetries and prevent households from making important purchase decisions. We summarize these reasons for microinsurance subsidies in the framework presented in figure 1. We provide examples of each type of subsidy, noting that subsidies can be of limited duration or could be implemented over the long term. In theory, subsidies for insurance can simultaneously address both market inefficiencies and inequitable coverage. For example, subsidies that remove inefficiencies that prevent poor people in particular from accessing schemes can increase equity of coverage. This report shows that insurance markets are particularly subject to asymmetries of information, externalities and high fixed costs of operation. This means that even when motivated by equity concerns, governments may find it more effective to first invest to address inefficiencies that arise as a result of these market failures, before considering traditional premium subsidies. For example, public investment in data collection and insurance-related technology to develop index insurance would be prerequisites for effective subsidies to promote equitable coverage in this type of insurance. 1 Definition of externalities: Factors whose benefits (positive externalities) and costs (negative externalities) are not reflected in the market price of goods and services. Externalities are a loss or gain in the welfare of one party resulting from an activity of another party, without there being any compensation for the losing party. Externalities are an important consideration in cost benefit analysis. (Vijay Luthra, Businessdictionary.com.) 8

17 Figure 1. Framework for using subsidies in microinsurance The majority of subsidized health schemes that we reviewed were put in place with the motive of increasing insurance coverage for poor households or those at risk. Some examples of such schemes (beyond the nine case studies reviewed in detail) are listed in the tables in the appendix. Subsidies for agricultural insurance are more likely to be put in place in order to encourage a well-functioning insurance market that supports economic growth in the agricultural sector. TYPE OF SUBSIDIES As shown in figure 1, there are several types of subsidies. Subsidies can be long-term, for example, premium subsidies, subsidies for reinsurance or some fully subsidized services; or short-term, to reduce high costs (like investment in technology) or provide insurance education. The type of subsidy to implement depends on several factors. What are the resources available to policy-makers or donors? What is the long-term strategy to finance subsidies? What are the main barriers to the development of insurance? The stage of development of the insurance market in the country is also a key factor to consider. (Are there enough data to price an insurance product? Is the population familiar with this type of insurance? What are the most common diseases of the target population?) If infrastructure is weak, it may be relevant to first invest in building it. If there is no long-term strategy for premium subsidies to be sustained, it may make more sense to invest in short-term subsidies to enable the development of the private sector. In a context of resource constraint, targeted subsidies may be more appropriate than universal ones. This distinction between targeted and universal subsidies is discussed in section

18 WHAT IS A SMART SUBSIDY? Smart subsidies are designed and implemented in ways that provide maximum social benefits while minimizing distortions in the market and mis-targeting of clients (Morduch, 2005). Figure 2 outlines the components of a smart subsidy. A subsidy should be designed with a clearly stated and well-documented purpose. It should address a market failure or equity concern, and should successfully target those in need with minimum inefficiency. 2 Smart subsidies are designed with a clear exit strategy or with a long-term financing strategy in mind. Additionally, a good monitoring and evaluation system that tracks the performance of subsidies is paramount for the success of any subsidized insurance scheme. Figure 2. Elements of a smart subsidy Exit strategy / longterm financin g Costs contain ed Monito ring and evaluat ion Clear objecti ve Targete d Transpa rent Efficiency is critical where public spending is concerned. There is no way to ensure efficiency without a clear objective for the subsidies, indicators to measure success and cost, and a proper monitoring system to collect information. Developing the correct monitoring system requires a good understanding of insurance mechanisms. As discussed in section 2.2, it may be more efficient to first invest in making the market more efficient before moving to traditional premium subsidies, for example, by ensuring all infrastructure is in place before launching the insurance scheme. Throughout the paper, we discuss whether cost containment strategies are in place and how well they are implemented. We look at the subsidy design and operation and at how both these things can have a serious impact on costs. Section 3.3 will for example discuss the necessity to have reliable targeting mechanisms before providing targeted subsidies. Subsidies need to be implemented with a clear exit strategy or with long-term financing (in the case of premium subsidies), keeping in mind that international experience shows that once subsidies are implemented, it is very difficult to cancel them. 2 Resources are put to their best use. 10

19 3 > PROMOTING EQUITY: EXTENDING COVERAGE TO THE EXCLUDED INTRODUCTION Many poor households spend considerable resources protecting themselves from risk, but they often lack the knowledge and money to buy commercially priced insurance products. Using subsidies that target specific excluded groups is a way to promote equity of coverage for low-income households or for those who are particularly at risk if they stay uninsured, for example, in the case of health insurance, children, pregnant women and the elderly. Nearly all subsidies aimed at promoting equity subsidize premiums rather than insurance infrastructure, capacity or reinsurance. Subsidizing the price of insurance can allow targeted households to pay an affordable price for microinsurance policies (some governments even decide to provide insurance for free or for a very low processing fee). Subsidizing premiums directly allows these subsidies to be targeted in a way that is not possible for subsidies to public investment in insurance infrastructure, capacity or reinsurance. However, this does not seem to be the sole reason for premium subsidies as we find that only in some cases are subsidies targeted at specific elements of the population. We recognized in section 2 the need to combine and sequence subsidies aimed at enhancing market efficiency and those aimed at promoting equity, and will discuss efficiency in the next section. The most common type of equity-based subsidies are long-term premium subsidies and by reviewing existing literature and drawing on the case study work completed for this report, this section will discuss lessons on the implementation of premium subsidies. This will also allow us to evaluate the achievements of the schemes analysed. We reserve the discussion of financing mechanisms for section 5. Considering the seven cases we reviewed which have an equity basis (Cambodia, Colombia, Ghana, Ethiopia, NAIS in India, RSBY in India, and Mongolia), the main objectives of those subsidies are to increase insurance penetration among a targeted group. For health insurance schemes the main objective is also to increase the use of services (measured as rate of use at health-care facilities) and reduce out-of-pocket spending. These schemes are discussed in detail in the boxes found throughout the document. INCREASING INSURANCE COVERAGE AMONG POOR HOUSEHOLDS Using premium subsidies increases coverage A large number of studies show that when insurance is subsidized, demand increases. A variety of studies on agricultural insurance have randomized the size of premium subsidy offered to households, which allows us to get a good sense of the price elasticity of demand. In China, Cai (2011) estimates a price elasticity of This means that the quantity of insurance purchased falls by 0.94 per cent (almost 1 per cent) when the price of insurance increases by 1 per cent. In India, Cole et al. (2013) estimate a price elasticity of 0.66 to 0.88 and Hill et al. (2013) estimate a price elasticity of In Ghana, the data from Karlan et al. (2012) suggest a price elasticity of demand of In Ethiopia, Berhane et al. (2012) estimate a price elasticity of We summarize the estimates coming from these studies in figure 3. It is worth noting that there were other differences, in addition to the different country contexts: the starting price point varied in each location as did the nature of the index. In section we discuss what happens when subsidies are removed, and as this discussion will show, it is not clear that demand will respond to the removal of price incentives in the same way as it does to introducing discounts. 11

20 Ghana (Karlan et al) China (Cai) India (Colet et al) India (Cole et al) Ethiopia (Berhane et al) India (Hill et al) Figure 3. Price elasticity of demand for crop index insurance in different countries For health insurance, fewer studies in developing countries have randomized the size of the premium subsidy provided to households. 3 However, the data we have suggest that demand is quite sensitive to price. A 6-month subsidy (worth about US$ 96) increased the take-up of health insurance by percentage points for a health scheme in Nicaragua (Thornton et al., 2010). In Cambodia a subsidy of five-sixths of the premium increased demand by 37 percentage points. These findings are consistent with studies that show that investment in preventative health care is highly price-sensitive in developing countries (Dupas, 2011). The case studies of national health insurance schemes Ghana (box 2) and Colombia (box 6) show that national subsidized insurance provision can increase insurance coverage quite dramatically, from 1 per cent to 33 per cent in Ghana and 16 per cent to 96 per cent in Colombia. Box 2. Using insurance to increase poor people s acc ess to health care: The case of Ghana In 2003 the National Health Insurance Act was passed in Ghana, creating that country s National Health Insurance Scheme (NHIS). The scheme required people to pay an annual fee according to their income to have access to public health facilities. The Government subsidized the poor as well as at-risk population groups (pregnant women, people over 70 years old and children aged 18 or under) to ensure that they could access health-care services. The District Mutual Health Insurance Schemes (DMHISs) operated the scheme. They collected all the premiums either from paying beneficiaries or from the National Health Insurance Fund (NHIF), which provided subsidies for the groups that were exempt. Currently the NHIF pays a premium per beneficiary annually equivalent to 14 Ghanaian cedis (GHS) (US$ 6.73). During 2011 there were around 345,569 exempted indigents (the poorest segment), 403,163 exempted beneficiaries aged 70 or above, 485,460 pregnant women and 4,089,228 children aged 18 or under as active members. This meant that 64 per cent of the total covered population was fully subsidized. The National Health Insurance Authority (NHIA) covered around 5,323,420 premiums, at GHS 14 each, amounting to GHS million (US$ million). Since the creation of the scheme there have been outstanding achievements. By the end of 2011, around 8.2 million people (or 33 per cent of the Ghanaian population) were covered by the insurance scheme. Before the creation of the NHIS less than 1 per cent of the population was enrolled in an insurance scheme. Yet this percentage hides the lack of success when it comes to including the poorest sector of the population in the scheme. Less than 2 per cent of Ghana s population is enrolled in the NHIS as indigents. This is very low compared with an estimated 28 per cent living under the poverty line, according to 2006 Ghana Living Standard Survey figures. Indigents are not registering for health insurance for many reasons, such as a lack of public awareness of the insurance system, the long distances to travel to registration 3 Studies of demand for health insurance in the United States suggest that the elasticity of demand for individual coverage is slightly lower than that estimated for agricultural insurance, generally in the range of 0.2 to 0.6 (Liu and Chollett 2006). 12

21 points, or a negative perception of the NHIS. In addition, the current method for identifying indigents through meanstesting, by the DMHISs in collaboration with communities, is vague. There is also the possibility for abuse in the process for registering indigents. Premium collectors may be in a position to accept bribes for registering ineligible individuals as indigents. Also, the DMHISs have an incentive to enrol members in the exempt category since the premium they are paid per person annually by the NHIF for these individuals is higher than the premium they receive from poor informal sector workers. In addition the system lacks flexibility in the payment of premiums, which, if incorporated, could promote registration of the poor who are not indigents. Many in the informal sector who are expected to pay the requisite premiums may be considered poor but not indigent. Poor informal sector workers may not be able to afford the premiums and may not qualify for the premium subsidies granted to the indigent. As a consequence, the insurance programme may unintentionally exclude poor informal sector workers. Indeed, the main reason given by poor households for not registering for the scheme is unaffordability of premium (91 per cent of the lowest socio-economic group answered as such). Also in practice, the NHIA payments are only income-related for the 3 per cent of the population who work in the formal sector. For informal sector workers, there is a flat rate premium per person. Despite its remarkable achievements in terms of increased health-care service use for the population as a whole (outpatient use of health-care services increased from 0.6 million in 2005 to 25.5 million in 2011, while inpatient use increased from 28,906 in 2005 to 1,451,596 in 2011) the NHIS still needs to improve its targeting mechanisms in order to fulfill its mission: to ensure equitable universal health-care access for all residents of Ghana. The poorest residents of Ghana are still not benefiting as they should. Using premium subsidies increases the use of services and reduces out-of-pocket spending The rationale for equity-based subsidies in health insurance schemes is generally to increase access to health care for targeted groups (on the assumption that it will lead to better health outcomes) and to provide them with financial protection by reducing their out-of-pocket spending and any debt they incur through health care. The examples studied show that those objectives were met. In all cases, the use of health-care services has increased thanks to access to insurance: In Colombia, Gómez et al. (2013) showed that those insured under the NHS in Colombia were almost twice as likely to use health services than those who were uninsured; in Ghana outpatient use of health-care services increased over forty-fold from 0.6 million in 2005 to 16.9 million in 2010 to 25.5 million in 2011, while inpatient service use increased over fifty- fold from 28,906 in 2005 to 1,451,596 in In India, the use of health-care services by households insured under RSBY increased from 1.9 per cent in the first year of the scheme to 5.2 per cent after three years of operation (Krishnaswamy and Ruchismita, 2011). The example of SKY in Cambodia (box 3) is interesting, as it highlights how channelling subsidies through insurance (as opposed to subsidizing health services directly) led to higher rates of use by the population (on average 1.47 visits to primary health-care centres per year for population receiving subsidies via insurance, compared to an average of 0.5 visits per year for subsidies in the form of fee exemptions). Although, for example, Asuming (2013) has shown that in Ghana, the number of days of illness per year suffered by those who are insured has decreased, or an impact study of the Hygeia scheme in Kwara state in Nigeria showed an increase in the use of modern medicine by 50 per cent, there are very few studies evaluating the impact of health insurance in terms of health outcomes. All cases also showed reduced out-of-pocket spending for the insured population. In Kwara state, out-of-pocket spending is 40 per cent lower for those who have insurance than for those not covered (Gustafsson-Wright et al., 2013). In Cambodia, it was shown that the SKY insurance scheme had the greatest impact on economic outcomes, decreasing the total costs of health care for serious health shocks by over 40 per cent, and reducing the debt of members: SKY members had over one-third less debt and over 75 per cent less health-related debt (Levine et al., 2012). 13