The Demand for (Micro) Health Insurance in the Informal Sector

Most of the world’s population in low- and middle income countries (LMIC) lives and works in the informal sector.1 In the developing world, the informal sector means small-scale, self-employed activities (with or without hired workers), typically unrecorded, unregistered and conducted without proper integration with the administrative machinery responsible for enforcing laws and regulations, usually escaping both the attention of and recognition from the authorities.2

The strong incentive to be in this informal context is that people are outside the framework through which most countries collect taxes or dedicated contributions. The down sides are numerous, notably being de facto excluded from the practical engagements of governments to recognise a universal “right to health” for all citizens3 through constitutions or engagements under international conventions and recommendations4 notably, the WHO decision on universal health coverage (UHC).5 Health insurance is a favoured road towards achieving UHC in most LMIC.6 While health insurance has the potential to reduce out-of-pocket payments (that the poor in the informal sector of developing nations make for health care) and improve access to necessary health care (that is often foregone when unaffordable),7health insurance penetration rates in the informal sector are very low.8 This low penetration raises an underlying question: If the benefits of health insurance are positively provable, how can theory explain the conditions under which the 3 billion or so in the informal sector of LMIC would seek voluntary health insurance?

While governments of LMIC have a central role in delivering health services to population segments in the informal sector, their ability to fund such services through taxation is severely limited when the untaxed informal sector is larger than the taxed formal sector,9 and their ability to expand service delivery through insurance is compromised by lack of capacity to enforce mandated affiliation,10 which is aggravated further when the mandate entails premium payments.11This combined constraint suggests that affiliation to health insurance in the informal sector would probably have to be voluntary and contributory.12 Thus, the question how can theory explain the conditions under which the 3 billion or so in the informal sector of LMIC would seek voluntary and contributory health insurance? begs a convincing answer that, we submit, the theories on health insurance do not yet provide.

The plan of this paper is that: in the next section, we draw on the literature and on evidence from the field to analyse the applicability of the core assumptions of conventional economic theories of demand for health insurance to the context of poverty and informality. In the subsequent section, we propose a theory structured by eight conditions that together provide a contextualised explanation of the demand for health insurance in the informal sector of LMIC. The last section contains our conclusions and policy recommendations on how to establish conditions under which the population in the informal sector of LMIC would seek voluntary and contributory health insurance.