Health shock and indebtedness: Does having access to health insurance reduce the reliance on borrowing as a shock coping strategy?

Abstract Households in developing countries are often impaired in their economic opportunities by major health shocks. In this article, we first investigate the impact of a health shock on rural household consumption and explore the mechanisms how the health shock brings a household into indebtedness. We then examine the role of health insurance in reducing the reliance on borrowing as a shock coping strategy. Our estimations show that while rural households are able to insure non‐health‐related consumption, a health shock pushes them into severe indebtedness by increasing informal borrowing to smooth consumption. Promotion of health insurance is recommended as it helps to protect households from falling into severe indebtedness when a health shock strikes.