From Participation To Repurchase: Low Income Households And Micro‐insurance

• Published date: 01 September 2020
• DOI: http://doi.org/10.1111/jori.12288
• Author: Renuka Sane,Susan Thomas
• Date: 01 September 2020

© 2019 The Journal of Risk and Insurance. Vol. 87, No. 3, 783–814 (2020).

DOI: 10.1111/jori.12288

FROM PARTICIPATION TO REPURCHASE:LOW INCOME

HOUSEHOLDS AND MICRO‐INSURANCE

Renuka Sane

Susan Thomas

ABSTRACT

The article asks what drives the time to repurchase for life and accident

insurance contracts in low income households. We use data on customers

of a financial services provider from three states in India and find that the

probability of repurchase is highest in the first 2 months after the contract

expires, and steadily declines after. This suggests a window of opportunity

for financial firms and governments to target customers to ensure con-

tinuous insurance purchase. Nonmembership of microfinance groups and

poor rainfall in the month of expiry affect the time to repurchase adversely.

Customers who take longer to repurchase tend to increase the amount of

insurance cover.

INTRODUCTION

In this article, we ask, when households’microinsurance policies expire, do they

return to repurchase it? How long does it take for households to repurchase in-

surance from the date of the expiry of the policy? We also ask if at the time of

repurchase, they increase the amount of insurance cover. Our analysis focuses on

the time to repurchase of microinsurance contracts for three reasons.

First, low‐income households are more vulnerable to shocks such as illness,

death, and drought, that adversely impact their ability to smooth consumption

(Dercon, 2002). These observations have led to an increased role of

microinsurance

1

in the policy debates on financial inclusion (Morduch,

2004).Studyingthismarketisimportantasitsdevelopmenthasthe

Renuka Sane is a faculty at NIPFP, Delhi. Sane can be contacted via e‐mail: renuka@saner.org.

in. Susan Thomas is a faculty at IGIDR, Mumbai. Thomas can be contacted via e‐mail: sus-

ant@igidr.ac.in. We thank the IFMR Rural Channels for access to the data, the IFMR Finance

Foundation for useful comments and Anurag Dutt for excellent research assistance. All errors

and omissions are our own.

1

Microinsurance is defined as protection of low‐income individuals against specific risks,

such as those outlined above, in exchange for regular premium payments proportionate to

the likelihood and cost of the risk involved (Churchill, 2006).

783

potential to impact the lives of millions of low‐income households across the

world.

2

Second, microinsurance contracts are typically 1 year contracts, making repurchase

an explicit decision. This is different from traditional insurance in that these con-

tracts present the possibility of individuals moving in and out of the market. Re-

search on the repurchase of microinsurance contracts is relatively limited, as most

research in the microinsurance space is focused on understanding “adoption”(Giné,

Townsend, and Vickery, 2008; Bendig and Arun, 2011; Gaurav, Cole, and To-

bacman, 2011; Cole and Gin, 2013; Dercon, 2014). What research there is, finds that

while repurchase is inhibited by similar factors as purchase, other considerations

such as experience with the insurance contract also play a role.

3

It is only when

insurance becomes a persistent element of the household financial portfolio, that it

can become a channel through which the household can better manage shocks to

earnings and consumption.

Third, understanding how long from the policy expiry to repurchase, and increases

in coverage may inform financial firms or the government on better design of in-

terventions to bring customers back into the coverage pool. If the household takes

some time to come back to repurchase, it must be that there is latent interest in the

product, and it might be useful to understand what affects the delay in the re-

purchase to design products and policies that can reduce this delay. It may be

economically beneficial to retain a customer instead of winning the customer back.

The article uses administrative data from a financial services firm that provides

microinsurance products (life and accident insurance)in three states of India. The

firm (IFMR Rural Channels and Services Private Limited, or IRCS)both provides

financial advice as well as financial products to low‐income customers, in regions

which otherwise have a lack of other financial service providers such as banks. Since

the IRCS branches tend to be the only service providers in these regions, they tend

to have customers who visit them repeatedly for varying financial needs.

The analysis is therefore, unlike most of the current literature where the randomized

control treatments typically focus on understanding household behavior around a

single experiment. Our data allows us to study customers whose initial insurance

policy purchased has expired, and now face the repurchase decision for the first time.

We find that the probability of repurchase is high in the first two months after

expiry, and steadily declines after. This implies that if a customer does not re-

purchase within the first 12 months of the expiry of the first policy, repurchase is

unlikely. Interestingly, customers who come back after a longer time since expiry of

the policy, seem to purchase a larger amount of cover. We also find that the rainfall

conditions in the month the policy expired influence repurchases—if rainfall has

been very poor, then repurchases seem to get postponed. This is especially the case

2

See Bock and Gelade (2012)and Eling, Pradhan, and Schmit (2014)for an overview of the

literature on microinsurance.

3

The literature is discussed in third section.

784 THE JOURNAL OF RISK AND INSURANCE

if the member is not a microfinance customer, that is, a member of a joint‐liability

group (JLG)prior to the purchase of the policy. These results suggest that the

availability of resources and liquidity appear to be the key factors in the repurchase

of micro‐life insurance. There may be a case for redesign of the insurance product,

where agents may be able to delay premium payments as has been suggested in the

microfinance literature (Liu and Myers, 2014).

In the class of developing or emerging economies, India has one of the highest

micro‐life and accidental death and disability insurance participation because of life

insurance regulations that mandate the sale of insurance products to rural areas

(Roth et al., 2007). Indian policy makers have incorporated insurance products as an

explicit element of their financial inclusion drive. For example, the Government of

India launched the distribution of a life microinsurance scheme in 2014, the Suraksha

Bima Yojna (DFS, 2015a)and an accident insurance scheme Jeevan Jyoti Bima Yojna

(DFS, 2015b). The life insurance product offers a sum of Rs. 200,000 (USD 3,000)at

an annual of premium of Rs. 12 (USD 0.18)upon accidental death, while the latter

offers the same sum at an annual premium of Rs. 330 (USD 5)upon the event of

death or permanent disability. These premiums are quite low at less than daily

average wage rate in India relative to the premiums in the traditional insurance

market,

4

and thus explicitly target the poorer among the population.

We expect that the market for microinsurance products will mature once customers

have consistently purchased these products, and they have observed actual claims

made by their friends, and neighbors, to conclude if such products do provide the

insurance cover that was promised. Understanding patterns in repurchases, as well

as observing decisions on how much low‐income households purchase of assured

amounts, can be valuable input into the design of the program in the coming years.

It also helps to connect to the larger global literature on lapsation in insurance

contracts, that can bring the two strands of literature—on microinsurance and in-

surance in general, together

5

The article is organized as follows. Second section presents a literature review on in-

surance repurchase. Third section describes the research setting. Fourth section describes

the data and methodology. Fifth section describes the results. Sixth section concludes.

REVIEW OF THE LITERATURE

The global literature on insurance comes at the question of continuous coverage

through the issue of lapsation of insurance contracts. The literature suggests three

main hypothesis for lapsation to occur.

6

The first is the “Emergency Fund Hy-

pothesis (EFH)”which states that policies lapse when policy holders face hardship,

4

https://tradingeconomics.com/india/wages

5

While lapsation is strictly not the same as repurchase, there are similarities in the sense of not

continuing with the policy for the full life of the insured.

6

(Eling and Kochanski, 2013)provide a detailed overview of the extant literature on life

insurance lapse.

785FROM PARTICIPATION TO REPURCHASE:LOW INCOME HOUSEHOLDS AND MICRO‐INSURANCE