Building Health Insurance and Microfinance in India

This paper evaluates the impact on loan renewal from mandating the purchase of actuarially-fair health insurance covering hospitalization and maternity expenses. Using a randomized control method, this paper studies the design of SKS Microfinance’s microinsurance offering in Karnataka, India. It shows that the presumption of bundling a health insurance program with a standard microfinance program would lead to a large client base is wrong. The study concludes that:

• SKS was successful in avoiding adverse selection in the take-up for their product, mainly because there was a lack of demand from people for this product, even though there was a clear value for them in its usage;
• Clients, a substantial fraction of them (about 16% points), preferred to let go of microfinance than pay 6% points more in interest rates and keep their loan. However, these households did not substitute for SKS loans with other microfinance loans, so their nonrenewal decision represents a net loss in access to microfinance;
• Due to loss in access to credit, client businesses suffered. The relevant margin for client drop-out may therefore have been their willingness to pay for a loan, and have nothing to do with the insurance per se.