World Bank protecting the vulnerable: the design and implementation of effective safety nets – health insurance for informal sector workers

This World Bank paper explores the challenges of providing health insurance in the informal sector and recommends strategies to improve coverage for informal sector workers. The authors highlight several problems associated with health insurance schemes for the informal sector, including weak financial sustainability, reluctance to enrol or lack of ability to contribute on the part of workers, adverse selection, and perverse incentives. Using empirical evidence from both developed and developing countries, the authors demonstrate that few such systems are able to sustain themselves from contributions, and the majority require some public funding. Many survive on the market only in the short-term. In addition, low coverage is a problem even where health insurance is mandatory.

The paper recommends that, in spite of these challenges, providing health insurance coverage for informal sector workers should be prioritised as the informal employment sector is growing in many developing countries. The case studies show that well designed systems, which include safeguards such as minimum periods of enrolment and exclusions, and remove perverse incentives, can improve sustainability and increase coverage for informal sector workers. However, the authors conclude that significant public subsidies will remain essential to adequately insure this population group.