Microinsurance Adoption and Financial Resilience: A Study of Household Response to Income Shocks in Developing Countries

Access to financial risk management tools remains critically limited for low-income households in developing countries, where income shocks frequently trigger irreversible welfare losses and poverty traps. Despite growing interest in microinsurance as a protective mechanism, rigorous empirical evidence on its effectiveness outside South Asian and African contexts remains sparse, and the behavioral and structural determinants of adoption are inadequately understood. This study examines whether microinsurance adoption enhances financial resilience among vulnerable households in developing countries, with a focus on mitigating the welfare consequences of income shocks. The analysis draws on secondary data from the Nepal Living Standards Survey IV (NLSS-IV), conducted in 2023 by the Central Bureau of Statistics of Nepal in collaboration with the World Bank, covering a final analytical sample of 425 households across rural and urban areas of Nepal, stratified by ecological zones (Terai, Hills, and Mountains) and urban-rural classification, with 73.4% rural and 26.6% urban representation. Logistic regression and propensity score matching were employed to estimate the causal effect of insurance coverage on household welfare outcomes, with instrumental variable analysis used to address potential selection bias; all estimations were performed using Stata. Microinsurance adoption reduces the probability of catastrophic health expenditure by 17.2 percentage points in the fully specified model, with the largest protective effects concentrated among the poorest households (28.4 percentage points for the bottom income quartile). Insured households maintain 31% higher consumption levels during health emergencies relative to uninsured households and are significantly less likely to sell productive assets (marginal effect: −13.2 percentage points) or engage in emergency borrowing (marginal effect: −11.8 percentage points) during shocks. Despite these benefits, overall adoption remains low at 18.6%, with education, income, and access to credit emerging as the strongest positive predictors of uptake. These findings highlight the role of microinsurance as a pro-poor financial resilience tool and offer actionable insights for policymakers, insurers, and development practitioners seeking to design more effective, inclusive, and scalable microinsurance programs integrated with broader social protection frameworks.