Is micro-insurance the next development revolution?

Robert Shiller writes:

According to a study by the Insurance Information Institute, expenditures on non-life insurance in 2003 amounted to only 0.83% of GDP in Indonesia, 1.19% of GDP in Thailand, and 0.62% of GDP in India, compared with 5.23% of GDP in the United States.

And his bottom line?

Foreign aid is no substitute for insurance. Charity inspires, reassuring us of our humanity, but it is often capricious. You wouldn’t want to rely on it. Indeed, when deciding how much disaster aid to offer, countries often seem to be influenced mainly by their leaders’ concerns about how others will view them. Charity responds to attention-grabbing events, often neglecting less sensational disasters.  Insurance, on the other hand, is a reliable and venerable institution, its modern form dating back to the seventeenth century.

Could the micro-credit revolution be followed by a micro-insurance revolution?  Shiller argues valiantly but I am not convinced.  Economists miss one of the biggest problems with insurance.  We are blinkered by adverse selection models, which imply that the dangerous prospects most want to buy insurance.  The opposite is more often true.  If you are an irresponsible driver, you are likely to be irresponsible in other spheres as well and not buy auto insurance.  On the whole many insurance markets show positive rather than adverse selection.  In a development context, this means that the people who most need insurance will be the least likely to buy it.


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