The most common definition of global poverty is living on two dollars a day or less. References to income of two dollars a day can be misleading because two dollars a day is an average. For the world’s poor, income is usually volatile and unpredictable. A person can earn 2 dollars today, 6 dollars tomorrow and nothing for the next two days. When you have a small and unstable income you are more vulnerable to risk. Emergencies in like illness, injuries, or bad storms can quickly become a financial crisis. In theory, poor households vulnerability should make them great candidates for insurance. Insurance can medicate destructions to income and minimize finance shocks of a negative event. But we don’t see many formal insurance products offered to poor households. There’s a market failure here. One of the causes is what economists call adverse selection. Adverse selection is caused by asymmetric information. That is, when buyers and sellers in a market have different information. Consumers know a lot more about the risks they face and usually know more about the likelihood of a particular shock happening. It’s difficult for insurers to assess risk for poor families who don’t have financial, medical, or business records. Because insurers can’t differentiate between high and low risk customers, they have to price insurance as if everyone is at high risk. But low risk customers will leave the market because the prices are more then they are willing to pay for insurance they probably won’t need. With fewer potential low risk customers the average risk of customers rises. So insurers raise prices again, forcing out more customers and so on in a vicious cycle. This means while insurers might initially make more money by raising rates, eventually they will begin to make less money, as rates increase because of the average risk of the customer is higher. If their profits peak at a level that is not profitable they will not serve the m