Insurance safety net catching people falling from poverty.

Can Inclusive Insurance Be the Key to Reducing Poverty? Exploring Subsidized Schemes

Kai Mendoza in Business & Economy August 2025 • 5 min read.

"Uncover how governments and private insurers are partnering to offer microinsurance, a powerful tool for poverty reduction, and whether subsidized premiums can maximize social benefits while reducing governmental costs."

In recent years, governments in developing nations have increasingly embraced insurance programs as a tool for social welfare. Countries like China and India have witnessed significant growth in their agricultural insurance sectors, largely due to the financial support and premium subsidies provided by both central and provincial governments. This surge in government involvement underscores the growing recognition of insurance as a means to protect vulnerable populations and promote economic stability.

While the role of insurers in alleviating poverty has been a subject of debate, effective coordination between governments, private insurance companies, and other stakeholders, including NGOs and international financial institutions, has proven crucial. Such collaborations enhance the development of sustainable, affordable, and cost-effective insurance products, making them accessible to those who need them most. The key lies in designing these insurance schemes thoughtfully, ensuring they address market deficiencies, promote consumer equity, and target those in genuine need.

Premium subsidies are the most common form of governmental support for insurance. In China, farmers benefit from subsidies that cover over 50% of the premium amount, while in India, the Pradhan Mantri Fasal Bima Yojana (PMFBY) charges farmers a maximum premium ranging from 2% to 5% of the sum insured, with the remaining portion subsidized by central and state governments on a 50/50 basis. These initiatives highlight the commitment of governments to making insurance accessible and affordable for their citizens. When designed properly, subsidized insurance schemes represent a powerful and cost-effective way to achieve public policy objectives, while poorly designed insurance premium subsidies can be inefficient and lead to significant economic costs.

How Do Subsidized Insurance Schemes Impact Poverty Dynamics?

Insurance safety net catching people falling from poverty.

Adopting a novel ruin-theoretic approach, this analysis delves into the impact of insurance, both with and without subsidies, on poverty dynamics and the governmental cost of social protection. It seeks to determine the benefits derived from coordination and partnerships between governments and private insurers and to highlight the cost-effectiveness of government support for insurance. By modeling the capital of a household from a ruin-theoretic perspective, the study measures the impact of microinsurance on poverty dynamics and the governmental cost of social protection under four frameworks: uninsured, insured (without subsidies), insured with subsidized constant premiums, and insured with subsidized flexible premiums.

The research considers inclusive insurance mechanisms designed to cater for the most vulnerable. Inclusive insurance, commonly referred to as microinsurance, relates to the provision of insurance services to low-income populations with limited or no access to mainstream insurance or alternative effective risk management strategies. Targeting low-income individuals living close to or below the poverty line, microinsurance aims to close the protection gap that exists between uninsured and insured losses to life, property, and health by providing protection to the poor.

Framework 1: Uninsured. This scenario establishes a baseline, illustrating the financial vulnerability of households without any insurance coverage.
Framework 2: Insured (Without Subsidies). This explores the impact of basic insurance coverage on households, where they bear the full cost of premiums.
Framework 3: Insured with Subsidized Constant Premiums. This examines the effects of constant premium subsidies on insured households, highlighting the potential for increased social benefits and reduced governmental costs.
Framework 4: Insured with Subsidized Flexible Premiums. This framework investigates the outcomes of using premium payment flexibilities when combined with subsidies, assessing if it optimizes household resilience.

While insurance alone, without subsidies, may not be sufficient to reduce the likelihood of falling into the area of poverty for specific groups of households, since premium payments constrain their capital growth, the analysis suggests that subsidized schemes can provide maximum social benefits while reducing governmental costs. The study complements previous research that analyzes the impact of inclusive insurance from both empirical and dynamic stochastic programming perspectives, introducing a more formal and rigorous mathematical framework that analytically demonstrates the benefits of partnerships between governments and private insurers. For that purpose, it adapts the piecewise-deterministic Markov process such that households are subject to shocks of random size, and considers a non-discretised capital process.

The Future of Inclusive Insurance

In conclusion, this study reinforces the importance of government-supported inclusive insurance in poverty alleviation. By offering a transparent method for calculating optimal subsidies, governments can strengthen social protection programs while lowering associated costs. The analysis suggests that subsidized microinsurance schemes, particularly those with flexible premium payment options, hold significant potential for reducing poverty and enhancing the financial resilience of vulnerable households. Embracing these strategies can lead to more equitable and sustainable economic growth, ensuring a brighter future for all.

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This article is based on research published under:

DOI-LINK: https://doi.org/10.48550/arXiv.2103.17255,

Title: Subsidising Inclusive Insurance To Reduce Poverty

Subject: stat.ap math.pr q-fin.rm

Authors: José Miguel Flores-Contró, Kira Henshaw, Sooie-Hoe Loke, Séverine Arnold, Corina Constantinescu

Published: 10-03-2021

Everything You Need To Know

What is inclusive insurance, and how does it relate to microinsurance?

Inclusive insurance, often called microinsurance, is about providing insurance services to low-income populations who usually can't access regular insurance. Microinsurance aims to protect the poor by covering life, property, and health risks, helping to close the gap between uninsured and insured losses.

How do government subsidies affect the accessibility and impact of insurance for vulnerable populations, especially in countries like China and India?

Government subsidies, such as those in China and India, make insurance more affordable by covering a significant portion of the premium. In China, subsidies cover over 50% of the premium for farmers. In India, the Pradhan Mantri Fasal Bima Yojana (PMFBY) allows farmers to pay only 2% to 5% of the premium, with the rest subsidized by the central and state governments. Subsidies are very important in making insurance accessible and effective for vulnerable populations.

What are the key frameworks used to analyze the impact of insurance and subsidies on poverty dynamics?

The analysis considers four frameworks to model the impact of insurance on poverty dynamics. These are: (1) Uninsured, which acts as a baseline; (2) Insured (Without Subsidies), where households pay the full premium cost; (3) Insured with Subsidized Constant Premiums, examining the effect of constant subsidies; and (4) Insured with Subsidized Flexible Premiums, exploring the use of premium payment flexibilities. These frameworks help to show the benefits of partnerships between governments and private insurers.

Beyond simply providing insurance, what role do partnerships between governments, private insurance companies, NGOs, and international financial institutions play in creating effective inclusive insurance schemes?

Effective coordination between governments, private insurance companies, NGOs, and international financial institutions is essential for developing sustainable, affordable, and cost-effective insurance products. These partnerships help ensure that insurance schemes address market deficiencies, promote consumer equity, and target those in genuine need, leading to better outcomes than if each entity worked in isolation. Together, they ensure schemes are well-designed and meet the needs of vulnerable populations.

How do subsidized microinsurance schemes with flexible premium payments affect poverty reduction and financial resilience for vulnerable households, and what does the research suggest about the cost-effectiveness of these schemes?

Subsidized microinsurance schemes, especially those with flexible premium payment options, can significantly reduce poverty and enhance the financial resilience of vulnerable households. These schemes offer a cost-effective way for governments to strengthen social protection programs. By allowing flexible premium payments, these schemes adapt to the financial constraints of low-income individuals, ensuring they maintain coverage and are better protected against unexpected shocks. This ultimately leads to more equitable and sustainable economic growth.