Implemented by
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
MICROINSURANCE
PAPER No. 29
i USING SUBSIDIES FOR INCLUSIVE INSURANCE
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 email: [email protected]. 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 www.ifrro.org 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, 2014 55 p. (Microinsurance paper ; no.29)
ISBN: 978-92-2-126328-9 (web pdf) International Labour Office
Key Words - microinsurance / subsidies / health insurance / agriculture insurance 11.02.3
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 email: [email protected]
Visit our website: www.ilo.org/publns
June 2011
MICROINSURANCE
PA
PE
R
N
o.
29
ii
USING SUBSIDIES FOR INCLUSIVE INSURANCE
CONTENTS
Contents...ii Acknowledgements...iii List of boxes...iv List of Tables...iv List of figures...iv Executive Summary...vLessons for governments...v
Abbreviations and acronyms...vii
1 > Introduction...1
2 > Framework...8
Rationale for subsidies...8
Type of subsidies...9
What is a “smart” subsidy?...10
3 > Promoting equity: Extending coverage to the excluded...11
Introduction...11
Increasing insurance coverage among poor households...11
Lessons on implementing premium subsidies...15
Summary...19
4 > 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...29
5 > Lessons in financing subsidies and controlling costs...33
6 > Conclusion...37
7 > References...40
8 > Appendix: Examples of subsidized microinsurance schemes, by type of subsidy ...44
MICROINSURANCE
PA
PE
R
N
o.
29
iii USING SUBSIDIES FOR INCLUSIVE INSURANCE
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.
MICROINSURANCE
PA
PE
R
N
o.
29
iv
USING SUBSIDIES FOR INCLUSIVE INSURANCE
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
MICROINSURANCE
PA
PE
R
N
o.
29
v USING SUBSIDIES FOR INCLUSIVE INSURANCE
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
MICROINSURANCE
PA
PE
R
N
o.
29
vi
USING SUBSIDIES FOR INCLUSIVE INSURANCE 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.
MICROINSURANCE
PA
PE
R
N
o.
29
vii USING SUBSIDIES FOR INCLUSIVE INSURANCE
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
MICROINSURANCE
PA
PE
R
N
o.
29
1 USING SUBSIDIES FOR INCLUSIVE INSURANCE
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 50–150 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).
2
USING SUBSIDIES FOR INCLUSIVE INSURANCE Box. 1. A note f or pol icymakers: 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 benef iciary as long as the individual is a policyholder (for example, the Colombian national health insurance scheme), but we do not
3 USING SUBSIDIES FOR INCLUSIVE INSURANCE
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, country, type of scheme (health/agriculture) Description of scheme (objective, targeted at …)
Rationale for the subsidy1 Type of subsidies used Partners involved HARITA/R4, Ethiopia. Agriculture
HARITA/R4 offers weather-indexed insurance to poor farmers in Ethiopia, who can pay their premiums in cash or through labour in irrigation and forestry projects. The goal is to enable them to build resilience against shocks and to benefit even when there is no insurance
Equity and efficiency (high fixed costs)2 Investment in product development, infrastructure and technology, insurance literacy, premium subsidies WFP, Oxfam America, Swiss Re, Rockefeller Foundation, Relief Society of Tigray, International Research Institute for Climate and Society, Nyala Insurance Share Company,
4
USING SUBSIDIES FOR INCLUSIVE INSURANCE
payout. and Oromia
Insurance Company, among others Index-Based Livestock Insurance (IBLI), Mongolia. Agriculture
IBLI is based on an index of livestock mortality rates by species, compiled and maintained by the Mongolian 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.
Efficiency (high fixed costs) Investment in product development, insurance data, reinsurance Government of Mongolia, World Bank National Agricultural Insurance Scheme (NAlS), Weather-Based Crop Insurance Scheme (WBCIS) and Modified National Agricultural Insurance Scheme (mNAIS), India. Agriculture
The three crop schemes aim to help farmers stabilize their incomes, particularly in disaster years. Compensation of the loss is assessed under the NAIS and the mNAIS on the basis of yield data provided by implementing states and under WBCIS based on weather data recorded by automatic weather stations notified by implementing states.
Equity and efficiency (high fixed costs and information asymmetries)3 Reinsurance, premium subsidies Government of India, private insurance companies including Agriculture Insurance Company of India (AIC) and ICICI Lombard, World Bank
Private rainfall index insurance (SEWA & BASIX, IFFCO-Tokio & ICICI Lombard, AIC & ICICI Lombard), India. Agriculture
ICICI Lombard, IFFCO-Tokio and other insurance companies are developing and underwriting different rainfall index insurance products, which are then marketed and distributed by microfinance institutions and NGOs such as BASIX and SEWA. The aim is to reduce farmers’ vulnerability to rainfall volatility. Efficiency (externality)4 Premium subsidies, investment in training and infrastructure Government of India, SEWA, BASIX, IFFCO-Tokio, ICICI Lombard, AIC
5 USING SUBSIDIES FOR INCLUSIVE INSURANCE
National Health Scheme (NHS), Colombia. 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 low-income and vulnerable groups that before were not previously considered by any health scheme in the country.
Equity Premium subsidies National Health Authority, health-promoting entities and subsidized health-promoting entities (insurance managers and providers) and health-providing institutions (health-care providers)
Health Equity Funds (HEFs) and SKY programme, Cambodia. Health
HEFs are a pro-poor health-financing 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 and efficiency (information asymmetries) Premium subsidies and technical assistance Agence française de développement (AFD – the French 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
6
USING SUBSIDIES FOR INCLUSIVE INSURANCE Health services through district
mutual health insurance schemes. Through a selective premium subsidies system, the poorest and most vulnerable are able to have access to health services.
Health Insurance Authority (NHIA) and district mutual health insurance schemes (DMHISs) PharmAccess and Hygeia Community Health Plan (HCHP), Nigeria. Health HCHP provides access to medical care for poor communities in Lagos and Kwara States by contracting health-care providers through donor-subsidized health insurance. The scheme targets informal sector workers and people engaged in farming and having small businesses, in order to increase the penetration of health insurance and improve the quality of health care.
Equity and efficiency (externalities) Premium subsidies, investment in programme development, technical assistance and capacity development, monitoring and management Dutch Ministry of Foreign Affairs, PharmAccess Foundation, Health Insurance Fund, Hygeia Community Health Care, Kwara State
Rashtriya Swasthya Bima Yojana (RSBY), India.
Health
RSBY offers an inpatient health product through private insurance companies (selected on the basis of competitive bidding) to any family below the poverty line (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. Equity and efficiency (high fixed costs) Investment in technology, premium subsidies Ministry of Labour and Employment, state Governments, World Bank, GIZ, Indian private insurance companies
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 4.3.
3 See section 4, first paragraph. 4 See footnote 1.
7 USING SUBSIDIES FOR INCLUSIVE INSURANCE
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.
8
USING SUBSIDIES FOR INCLUSIVE INSURANCE
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 externalities1 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 insu rance-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.)
9 USING SUBSIDIES FOR INCLUSIVE INSURANCE
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 3.3.
10
USING SUBSIDIES FOR INCLUSIVE INSURANCE
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
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.
Clear objecti ve Tra ns pa rent Targete d Monito ring and evaluat ion Exit strategy / long-term financin g Costs contain ed
11 USING SUBSIDIES FOR INCLUSIVE INSURANCE
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 specif ic 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 − 0.94. 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
−0.55. In Ghana, the data from Karlan et al. (2012) suggest a price elasticity of demand of − 0.99. In Ethiopia, Berhane et al. (2012) estimate a price elasticity of −0.58. 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 4.2.3 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.
12
USING SUBSIDIES FOR INCLUSIVE INSURANCE 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 28–33 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 peopl e’s acc ess to heal th 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 74.53 million (US$ 35.77 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).
-1 -0.8 -0.6 -0.4 -0.2 0 G ha na (K arl an e t a l) C hi na (C ai ) In di a (C ol et e t a l) In di a (C ol e et a l) Et hi op ia (B er ha ne e t a l) In di a (Hi ll et a l)
13 USING SUBSIDIES FOR INCLUSIVE INSURANCE
points, or a negative perception of the NHIS. In addition, the current method for identifying indigents through means-testing, 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 2011. 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).
14
USING SUBSIDIES FOR INCLUSIVE INSURANCE Box 3. Using insurance to increase the use of heal th - care f acil ities in Cambodia
In 1996, in order to help finance the health-care system in Cambodia, the Government started charging fees to the users of public health facilities, while exempting the poor from such contributions. However, this arrangement faced some bottlenecks in practice: since no subsidies were provided to the health-care facilities, user-fee exemptions for the poor were not effectively put in place. To overcome this challenge and attract donor funding to subsidize the waived fees, Cambodia became the first country to test the use of Health Equity Funds (HEFs) in the early 2000s. HEFs are not an insurance programme but rather third-party payers that reimburse public health facilities for user-fee exemptions for the poor. These HEFs are financed by a group of donors (World Bank, AusAid, BMZ/GIZ and UNICEF) as part of the Health Sector Support Program (HSSP), as well as by counterpart funds from the Ministry of Health (MOH).
In an effort to seek harmonization between the HEFs and the community-based health insurance (CBHI) schemes, which represent the primary private sector option available to the country’s informal sector workers, providing coverage for use of public health-care facilities at all levels, the MOH decided to test the linkage between HEFs and the SKY programme, a CBHI scheme launched by the French NGO GRET. The pilot took place in Kampot district from May 2008 to June 2012 with the support of GIZ, AFD (the French international development agency) and the second HSSP. The main goal was to learn whether the fusion could lead to more equity (measured by increased health-care service use) and efficiency (measured by the cost of the subsidy per individual). The SKY programme was managing the whole scheme, receiving the HEFs’ member premiums via donor contribution. HEF members were given the same insurance card as CBHI members, and had access to the same benefit package.
The results from the pilot show that using the insurance mechanism led to increased use of public health-care providers by the poor. In the third year of the pilot, HEF members in the treatment group went 1.47 times per year on average to a health centre, compared to an average of 0.5 visits of HEF members outside the pilot (Goursat, 2011). Goursat (2011) identified some reasons for this increase, namely the fact that HEF members were not stigmatized at health centres, as they were using the same health insurance card as the voluntarily enrolled CBHI members; that poor people were provided with information on the scheme benefit package and functioning; and that the insurance provider was carefully monitoring the health-care facilities. It also highlighted the difficulty of ensuring proper coverage in the absence of subsidies for the near-poor category, as only 6 per cent of the near-poor population did register for the contributory scheme.
However, the very different natures of the mandatory HEF coverage and the voluntary CBHI scheme led to controversies regarding the efficiency of the pilot programme. Non-contributory members use health-care services less than voluntary contributory ones and if donors are willing to subsidize only the poorest, it may not be cost-effective to apply the same cost structure to both groups. Nonetheless, without access to subsidies, the near-poor are likely to be excluded from coverage.
Subsidies do not always benefit the targeted population
However, although insurance demand is price-sensitive, it is likely to be difficult to achieve universal coverage through subsidies alone. Purchase rates remain low among poorer households and as a result, untargeted subsidies are likely to benefit richer households disproportionately. We have considerable evidence that shows that the purchase of agricultural and health microinsurance products is higher among wealthier households (Cole et al., 2013; Wagstaff et al, 2009; Wagstaff and Pradhan, 2005; Jütting, 2004; Lamiraud, et al., 2005). In India Giné et al. (2008) show that the average holding size of weather-indexed insurance purchasers is 3.50 hectares compared to the average land-holding size of 2.35 hectares.
15 USING SUBSIDIES FOR INCLUSIVE INSURANCE
Wagstaff et al. (2009) find that the heavily subsidized cooperative health insurance scheme promoted in China in 2003, did not improve insurance take-up or health-care use rates among the poorest 10 per cent of the population and increased demand only from those in the 2nd to 10th income deciles. The NHIS in Ghana also provides an example of a scheme that fails to reach the poorest, as is shown in box 2.
Below we discuss how targeting and additional investment can help. However, mandating insurance, in combination with subsidies to make it affordable, may be a more promising approach.
LESSONS ON IMPLEMENTING PREMIUM SUBSIDIES
Targeted subsidies have the potential to be more effective than universal subsidies to ensure eq uity, provided that targeting strategies are wel l designed and tested bef ore impl ementation
Universal subsidies are ones that are available for the entire population, as opposed to targeted subsidies, which are only accessible by a pre-determined category of the population. Universal subsidies will only address equity of access if the demand for insurance is more responsive to price discounts among poorer households than richer ones (or among the group of households for whom we are hoping to increase coverage, which could include the near-poor as in many countries the near-poor could also benefit from financial support for insurance). The price elasticity estimates presented in figure 3 are estimated for all households on aggregate. Given we know that richer households tend to purchase insurance, it is likely that universal subsidies will differentially benefit richer households. A review of untargeted subsid ies on food items found that these subsidies in some cases benefited the rich more than the poor (Coady et al., 2004). This corresponds to findings that subsidized schemes still attract wealthier households (Wagstaff et al., 2009; Mahul and Stutley, 2010), and suggests that for subsidies to differentially enable access for the poor, some form of targeting may be necessary.
Two of the challenges in targeting subsidies that widen access to insurance coverage lie in identifying those who should be targeted for the subsidy, and putting in place a good targeting mechanism. An effective strategy to identify and target low-income groups has to be tested and perfected before a scheme is implemented. If it is well targeted, subsidized insurance can include the poor and result in behaviour change. NHS in Colombia and HARITA/R4 in Ethiopia (discussed in box 4) provide examples of successful targeting. In Colombia, the poor, indigent, and unemployed are covered by the “subsidized” half of the health insurance programme. The scheme uses the System for the Selection of Beneficiaries of Social Programs, often called SISBEN, to identify these low-income and vulnerable groups. Oxfam America’s HARITA project in northern Ethiopia has used the Ethiopian Government’s safety net programme to identify poor households. Households that are qualified to participate in that programme also receive a full premium subsidy for the insurance in exchange for engaging in additional public works programmes. In contrast, the NHIS in Ghana has failed to target low-income groups effectively, as detailed previously in box 2.
Box 4. HARI TA/ R4
Weather-related shocks are a constant threat to the security and well-being of many poor farmers in Ethiopia. To help them build resilience and face these challenges, Oxfam America, Swiss Re, and their partners developed the Horn of Africa Risk Transfer for Adaptation (HARITA) programme in the state of Tigray in Ethiopia in 2008. HARITA is an integrated risk management programme aimed at strengthening farmers’ food and income security through a combination of improved resource management, insurance and microcredit.
HARITA allows cash-poor farmers the option to work for their insurance cover by engaging in community-identified projects to reduce risk and build climate resilience, such as improving irrigation or managing soil. Though the premium is fully subsidized for some farmers, they still pay for the full price of the insurance cover with their work. Farmers who are
16
USING SUBSIDIES FOR INCLUSIVE INSURANCE in a slightly better financial situation, on the other hand, must pay for the coverage in cash in order to enjoy the same benefits. The long-term goal of the programme is that farmers participating in the “work-for-insurance” modality can eventually graduate and afford to pay in cash, allowing other farmers in need to take their place in the programme. In the event of a seasonal drought, insurance payouts are triggered automatically when rainfall drops below the determined threshold, enabling farmers to afford the inputs necessary to plant in the following season and protecting them from having to sell their assets. However, the most innovative feature of HARITA is that farmers benefit even when there is no payout, as the risk management infrastructures built through their work will help reduce risk during next seasons.
In order to target the vulnerable low-income rural population living in Tigray to participate in the programme, HARITA was built on top of the Government’s “food- and cash-for-work” Productive Safety Net Programme (PSNP), a well-established scheme that serves 8 million chronically food-insecure households in Ethiopia. By using an already existent safety net programme, HARITA managed not only to better reach its target population, but also to reduce the costs of establishing a distribution network from the start. While the distribution model makes it easier to reach those who have time to spend on community work, it excludes poor households that do not have excess labourcapacity, such as female-headed or elderly households.
In December 2010, after a partnership with the WFP, HARITA was renamed “R4” and expanded to 76 villag es in Tigray, reaching around 20,000 farmers. The programme has experienced high demand and the “work-for-insurance” segment reaches capacity within the first couple of days of being introduced in a new area. Though the idea is to extend the programme to other areas that face the same constraints, lack of funding limits scale. The reliance on subsidies limits the scale at which the insurance can be offered, as funding is needed to pay for the public works that can pay for the premium.
All targeting mechanisms carry errors of exclusion and inclusion, although some do so more than others. Coady et al. (2004) reviewed 122 targeted anti-poverty programmes and found that the type of targeting mechanism used and the capacity of the government or organization implementing the targeting were important in determining the degree to which a programme would be successful at reaching those it was intended for. We summarize some of the findings from the Coady et al. paper in table 2.
If certain geographical areas are identified as being particularly poor, then providing all residents of those areas with subsidies can be a cost-effective way of targeting. A scheme based on this method will still include a number of non-poor who reside in those areas (and exclude poor people who reside elsewhere), but it has low administrative costs. Targeting easily identifiable segments of the population that are more likely to be poor or particularly vulnerable to the costs of being uninsured, such as the very young or the very old, can be another relatively low-cost means of targeting. However, this again will result in errors of inclusion and exclusion, and the mechanisms by which these segments of the population are targeted will also contribute to this. Yip and Berman (2001) show that targeting health insurance subsidies to school-age children in Egypt did increase access to health services among children in poor families who were at school, but resulted in the exclusion of low-income rural households that did not send their children to school. In addition, as table 2 shows, although targeting the elderly or the poor may ensure they get access, it does not necessarily mean that the poorest households have been helped.
Targeting subsidies to low-income households via means-testing is not straightforward in countries without easy access to suitable administrative systems. In these cases identifying low-income households often relies on the selection of individuals at the community level, often by community leaders. Errors of inclusion and exclusion in this type of system have been estimated to be as high as 42 per cent and 40 per cent respectively (Jayne et al., 2001), rendering the
17 USING SUBSIDIES FOR INCLUSIVE INSURANCE
targeting progressive, but not by much. Requiring that assistance is provided to selected households only if they choose to exert labour on public works projects can be a means by which to improve targeting. In these cases targeting can improve such that the bottom 40 per cent receives 56 per cent of the payouts (Gilligan et al., 2010). When targeting is entirely based on self-selection into such schemes, it is much improved: the bottom 40 per cent of the income distribution receives 76 per cent of the benefits of these programmes (Coady et al., 2004). However, self -selection is costly. Furthermore, with all means-tested schemes, there is a risk that those just above the selection threshold will not be able to access the insurance market without public support.
Table 2. Targeting subsidies
Type of targeting Examples Administrative
req uirements
Average targeting ef f iciency1 Means test Poor households are identified through a report
of their income or some proxies of income (e.g. type of house, asset ownership)
High 1.50–1.55
Community assessment Community leaders identify poor households Medium 1.40
Geographical targeting All households in a certain geographical location are targeted
Low 1.33
Categorical targeting Children or old people are targeted as a means of identifying poor households
Medium 1.16 (elderly)
1.53 (young) Self-selection Individuals are asked to perform some time
consuming task (such as public works, applying in person, paperwork) in order to access the free service2
High 1.89
1 A ratio of the proportion of resources that go to the poorest households; the higher the ratio the better the targeting. For example, if
the poorest 40 per cent of the population receive 60 per cent of the benefits of a programme this indicator would be 1.5 (0.60/0.40). For a full definition and discussion of data, see Coady et al. (2004).
2 People with a high opportunity cost of time or with a strong preference of not being identified by others as “poor” will self-select out
of accessing the service. Source: Coady et al. (2004).
If targeting is likely to be difficult, or if a large share of the population is being targeted, then it may be better to provide universal subsidies. As evidenced in the appendix, a number of subsidy schemes that are motivated by equity concerns do put in place universal subsidies. Mahul and Stutley (2010) found that 35 per cent of countries put universal subsidies in place for agricultural insurance, while 27 per cent of countries used targeted subsidies. A universal subsidy is a regressive public investment, with more benefits accruing to wealthier than to poorer households; but the degree of
