Subsidising Inclusive Insurance to Reduce Poverty José Miguel Flores Contró Kira Henshaw Sooie-Hoe Loke Séverine Arnold Corina Constantinescu Abstract In this article, we consider a compound Poisson-type model for households’ capital. Using risk theory techniques, we determine the probability of a household falling under the poverty line. Microinsurance is then introduced to analyse its impact as an insurance solution for the lower income class. Our results validate those previously obtained with this type of model, showing that microinsurance alone is not sufficient to reduce the probability of falling into the area of poverty for specific groups of people, since premium payments constrain households’ capital growth. This indicates the need for additional aid particularly from the government. As such, we propose several premium subsidy strategies and discuss the role of government in subsidising microinsurance to help reduce poverty. Keywords— microinsurance; poverty traps; trapping probability; cost of social protection; government subsidies. 1 Introduction Inclusive insurance (or microinsurance) relates to the provision of insurance services to low-income populations with limited access to mainstream insurance or alternative effective risk management strategies. Many individuals excluded from basic financial services and those microinsurance aims to proctect, live below the minimum level of income required to meet their basic needs. Currently fixed at $1.90 USD per day, 9.2% of the population were estimated to live below the international extreme poverty line in 2017 (?). Increases in the number of new poor and those returning to poverty as a result of the COVID-19 pandemic are expected to reverse the historically declining poverty trend (?). Fundamental features of the microinsurance environment such as the nature of low income risks, limited financial literacy and experience, product accessibility and data availability, create barriers to penetration, particularly in relation to the affordability of products. For the proportion of the population living just above the poverty line, premium payments heighten the risk of poverty trapping and induce a balance between profit and loss as a result of insurance coverage, dependent on the entity’s level of capital. Here, poverty trapping refers to the inability of the poor to escape poverty without external help (Kovacevic and Pflug, 2011). Highlighting vulnerability reduction and investment incentive effects of insurance, Janzen et al. (2020) observe a marked reduction in long-term poverty and the social protection costs required to close the poverty gap following introduction of an asset insurance market. Calibrating their model to risk-prone regions in Africa, their study suggests that those in the neighbourhood of the poverty 1 arXiv:2103.17255v1 [stat.AP] 10 Mar 2021