Most of India’s rural population and much of its urban population live and work in the informal sector. As the government cannot provide quality healthcare free of charge across the informal sector, and is extremely challenged in basing subsidies on effective means-testing, most people in the informal sector pay for healthcare at the point of service. Many delay or avoid healthcare due to financial constraints. Prepayment and pooling of risks through insurance are recognised worldwide as more equitable solutions, and WHO and the UN promote inclusion of the entire population (“universal health coverage”). Yet, penetration of health insurance in the informal sector is very low as neither the government nor the insurance industry attracts voluntary enrolment in contributory health insurance. Some community-based health insurance (CBHI) schemes do attract the poor to pay modest premiums. The secret of success is that their governance is consistent with local norms and rules-in-use.

Causes of the low penetration rates
The low penetration rates of health insurance have been attributed to a raft of causes on the demand and supply sides. On the supply side these include: poor business infrastructure, inability to monitor contractual compliance, need to tailor schemes to local needs, inability to determine capacity to pay, high agency and distribution costs, low uptake rates and high annual attrition rates. On the demand side these include: lack of trust of formal contracting, lack of affordable means to ensure contractual compliance, a lack of “awareness” (contracting experience), lack of relevant affordable schemes, and poor fit with traditional patterns of reciprocity.

In confirming these causes, the work of the Micro Insurance Academy in the informal sector has found that the solution is not to address particular causes separately, but to see them as a syndrome of symptoms that result in the non-existence of a market for health insurance across much of the informal sector.

Informal sector as a problem for business as usual

• Although the theory and practice of health insurance in developed countries is well understood, what matters here is to understand how the informal sector is fundamentally different due to:
• Radical and multifaceted information asymmetries: There is a chasm between the circles of knowledge; community members having access to rich local sources (gossip), and insurance companies having domain specific knowledge.
• Essential difficulties establishing and enforcing contracts: Exclusion from formal records and poor recourse to affordable legal mechanisms result in strong preferences for transactions between community members.
• Fundamentally different business process: Insurance companies’ expectations may conflict with ingrained obligations, and neither party may understand the other’s interests.
• Profoundly different concepts of willingness to pay: Community members may use logic at odds with cost-plus pricing.

Together, these characteristics dovetail to form a puzzle confounding parties external to the community and creating reliance on the community to make decisions on matters of community-wide interest and to determine what a responsible adult will do.

Leveraging the power of the informal sector
If we shift the paradigm from individual to community-based interactions, the informal sector becomes an asset that can be leveraged for sustainable solutions. Communities are historically-seated governance structures where reciprocal relations provide informal “insurance” from birth. If formal health insurance is not separated from the desire to belong to and be protected by the group, it can improve and expand this informal protection while strengthening community resilience and capacity to provide benefits to members. Gossip, multiple sources of local information and first-hand knowledge of local needs and risk priorities imbue communities with the informational needs to govern health insurance.

However, communities typically lack insurance domain specific knowledge, may have inadequate management prowess, and may require support to extend their governance to contractual insurance arrangements. Therefore, to bring the innovation of formal health insurance to their members, communities need an expert change agent, ideally one that is not looking to profit from the engagement.

Evidence of success
CBHI gives the community the central governance role and responsibility for designing the scheme including setting premiums, selecting benefit packages, determining membership eligibility and establishing protocols for settling claims. This model has succeeded in several locations across India in establishing the market for health insurance with credible, reliable governance enabling solvent demand to drive the supply of health insurance.

Where the schemes have been entirely self-funded by contributions, they have been shown to be sustainable without subsidy. While there is a tendency for communities to run their own CBHI (i.e., to be their own insurance company), this is not necessary as long as the governance structure is established/agreed by the community. The external change agent is essential in helping community leaders build awareness, imparting management and actuarial expertise, and applying local governance principles in early implementation and operational stages.

Myths busted
The success of CBHI schemes shows us that our understanding of the poor’s attitudes to health insurance is based on erroneous myths. Some myths that have been busted are:

Myth: The poor cannot pay.
Manifestly, they will.

Myth: The poor have poor insurance awareness.
With appropriate support, community members design their scheme to be sustainable. And, local self-help groups succeed in governing and running their scheme.

Myth: The poor do not look at the coverage, only at the premium, so insurance for the poor must be cheap.
While the capacity to pay is low, where the poor design their scheme careful selection of covered items leads to popular uptake.

Myth: Beggars can’t be choosers.
The poor insist on making choices, and in CBHI they are involved in choosing details of cover.

Myth: The poor will only buy insurance when they think they can get more than they pay (moral hazard and adverse selection).
Not only are community benefits of primary importance, but local gossip prevents gaming their system. 

Myth: Insurance is not bought, it is only sold because supply drives demand.
Where centralised, top-down, supply-driven schemes have failed; local governance establishes an environment in which demand drives success.

Myth: Health insurance can only cover rare and expensive events like hospitalisations.
As the poor worry about unpredictable costs, hardship financing and further impoverishment, their schemes cover routine and unpredictable costs such as tests and imaging rather than big ticket items.

Policy challenge
Now that these myths are busted, and it is clear that we will only see the establishment of the market for (micro) health insurance in the informal sector when local governance is recognised, facilitated and enhanced by institutions of state and by the business community, the challenge for India is to adjust it policy settings to support local governance to enable demand to drive the establishment of sustainable health insurance for her hundreds of millions of uninsured poor in the informal sector.