Demand for insurance

Sheenu Jhawar

In ordinary language, risk can be stated as the probability of incurring a loss. In relevance to health it gets translated into a situation, where more than one negative health outcome can be anticipated.

In my opinion, ‘risk’ and the population’s ‘perception of risk’ is a key factor to understanding both issues. Some people are more than willing to bear risk than others are, but everyone prefers less risk to more. This attitude can better be described as risk aversion. Since insurance works by pooling risks where every insured person pays in, but only those who suffer a loss are compensated, therefore in the eyes of the population insurance is worth buying and is profitable only when people are averse to risk and are willing to pay for lower risk.

This raises two issues: (A) Who will buy insurance? Likely that it would be a person who has a fair idea of the risks that he faces, a person who is aware of the costs involved with that risk or a person who is willing to pay for that risk-aversion. (B) Will Supplier Induced Demand (SID) affect him? Likely, but only to a certain degree.

If a person is aware of the health risks to himself, he has valuable ‘information’, which he can use to his advantage. But the important thing to remember is that if a person does not feel that he faces any risk of ill health he will not buy insurance, however informed he might be.

This is a crucial factor to understanding consumer behaviour towards buying health insurance. Some people might argue that the cost of premia is the more important issue. The fallacy of this statement will be that they are considering ‘risk’ and ‘cost’ to be two different entities.

To my mind they are one and the same. This can be explained by the following statement: we will be willing to pay for a commodity/(health insurance) only if we evaluate its opportunity cost to be much higher (risk of ill health). So if we perceive the risk to be high enough, we don’t mind paying a higher premium, (provided we are not getting any other competitive rate).

To promote health insurance in the present scenario, two things are possible — having a very low premium (by insurance companies) or a high priority on health (by the individual). A low premium might not be cost efficient and feasible; therefore the only option is to increase people‘s understanding and desirability of better health. Or in other words improve their understanding of risk.

This can be done by:

1) Counselling of people on a one to one basis.
Perhaps, we can have a family health insurer agent —- like the concept of the LIC agent that the whole family interacted with.

2) Providing incentives, by lowering the premium for those people, who make an effort towards leading a healthy lifestyle.

Budget constraint
Individuals have only got limited resources at their disposal. The simplest version of this assumption is, that individuals have a given income with which to finance their health production, and consumption activities. Therefore since an individual has a budget limitation, he will rather spend on commodities he perceives more important and not on commodities for which he has no utility at the current time.

An example for this can be: paying for a crate of coke on a summer day, as compared to buying a crate in winter time for the purpose of storage. Translated into healthcare, it would mean, a person might be more willing to pay for a ‘curative’ hospital procedure but might not be able to justify a preventive measure, given a budget constraint. An example is the preventive measure of: ‘cervical screening in women.’

The individual might not want to pay for a regular screening program because she cannot justify the expenditure on her limited budget. However this does not eliminate a future risk (probability) of cervical cancer. If she does not develop cancer, there are no consequences of her decision. But if she does, then, she will incur a far greater expenditure in future as an opportunity cost of this decision.

Conclusion
For an in-depth understanding of consumer behaviour towards health insurance, the following stand out as very crucial elements : a) his priority to health, b) his understanding of the concept of health (what all factors contribute to it), c) and his awareness to cost effectiveness of prevention. Copying a foreign model or applying out-landish policies, gives a falsified sense of corporatisation. One needs to get into the skin of the population before chalking out a policy.

(The author is clinical auditor, Mid Stafford General Hospital, UK. She may be contacted at sheenujhawar@yahoo.com)