“An alternative form of risk management for health microinsurers – microinsurance linked securities”

This paper proposes an alternative method for health microinsurers to manage their insolvency risk, by securitising the microinsurer’s risk of excessive loss, so that it may be purchased and traded on capital markets. It is argued that this could be a more efficient risk management method than reinsurance or self insurance, as the riskiness of a microinsurance linked security in a diverse market portfolio may be less than the risk premium demanded by a reinsurance firm. The paper uses a previously devised asset pricing model to demonstrate how a microinsurance linked security could be priced, so that it may be compared with the cost of reinsurance and self insurance. The paper concludes with a discussion on factors to consider for a microinsurance linked security to be issued, and how it might assist with the expansion of health microinsurance in the coverage of low income households in developing countries.