The Effects of Microinsurance on the Insurance Market: A Theoretical Analysis

Abstract

Microinsurance is considered as the fortune at the bottom of the pyramid. Can commercial insurers benefit from serving the customers who were excluded by conventional insurance? Most of the existing literature on the effects of microinsurance addresses the impacts on the well-being of low-income families or economic development. This current paper bridges the gap by analyzing the effects of microinsurance on the existing insurance market. Our results show that the competition between micro and conventional insurance will decrease the insurer`s market demand for conventional insurance. Both the premiums and profits of conventional insurance will reduce after providing microinsurance. In the asymmetric case with only one provider, we show that the provider`s premium for conventional insurance and its profit are lower than the non-providers. Our analysis provides guidelines for commercial insurers` product decisions and gives policy suggestions for the future development of microinsurance.