Risk-Revealing Contracts for Government-Sponsored Microinsurance in China

22 Pages Posted: 4 Feb 2019

See all articles by Bingzheng Chen

Bingzheng Chen

Tsinghua University - School of Economics & Management

Frank Yulin Feng

Shanghai University of Finance and Economics

Michael R. Powers

School of Economics and Management, Tsinghua University

Joseph Qiu

JLT Re

Date Written: December 15, 2018

Abstract

China’s Urban and Rural Residents’ Basic Medical Insurance (URRBMI) system recently was formed to integrate two prior-existing government health insurance programs for low income citizens: the New Cooperative Medical Scheme (for rural residents) and the Urban Residents’ Basic Medical Insurance system (for non-employee city dwellers). Like its two predecessors, the URRBMI is a voluntary, government microinsurance facility whose lack of underwriting procedures makes it vulnerable to adverse selection. To address this problem, we propose a practical contract mechanism that encourages each buyer to purchase a coverage amount that reveals his/her inherent risk level, for an actuarially fair price. Historical provincial-level data from the New Cooperative Medical Scheme are used to illustrate the proposed approach.

Keywords: Health Insurance, Microinsurance, Government Monopoly, Adverse Selection, Risk-Revealing Contract

JEL Classification: D53, G22, I13

Suggested Citation

Chen, Bingzheng and Feng, Frank Yulin and Powers, Michael R. and Qiu, Joseph, Risk-Revealing Contracts for Government-Sponsored Microinsurance in China (December 15, 2018). Available at SSRN: https://ssrn.com/abstract=3313294 or http://dx.doi.org/10.2139/ssrn.3313294

Bingzheng Chen

Tsinghua University - School of Economics & Management ( email )

Beijing, 100084
China

Frank Yulin Feng (Contact Author)

Shanghai University of Finance and Economics ( email )

Shanghai, 200433
China

Michael R. Powers

School of Economics and Management, Tsinghua University ( email )

Beijing, 100084
China

Joseph Qiu

JLT Re ( email )

The St Botolph Building, 138 Houndsditch
London, EC3A 7AW
United Kingdom

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