Estimating hospitalization risk and pricing a daily health microinsurance product for informal market vendors in Kampala: a Poisson‑Gamma Model using primary data

Abstract

Informal sector workers in Uganda, particularly market vendors in urban centers like Kampala, face significant vulnerability to health shocks. Lacking formal safety nets, a single hospital admission can lead to devastating out-of-pocket medical expenses and severe business disruptions due to lost working days. Despite this clear exposure, conventional health insurance remains out of reach because of high premium thresholds and rigid payment schedules that do not match the volatile cash flows of informal vendors. This study aimed to model annual hospitalization risks, analyze the financial severity of health shocks, assess consumer willingness to pay (WTP), and construct a baseline pricing framework for a localized, daily premium health microinsurance product tailored for informal market vendors across Kampala. The study utilized primary cross-sectional survey data collected from a representative sample of 354 market vendors across major markets in Kampala, including Owino, Nakasero, Kalerwe, and Wandegeya. Actuarial claims experience was analyzed by breaking it down into frequency and severity components. Annual hospitalization frequency was evaluated using count-data models (Poisson and Negative Binomial frameworks) to test for population overdispersion. Singleadmission financial severity and overall annual health costs were modeled using heavy-tailed parametric distributions (Gamma and Lognormal). Pure premiums were derived using the standard collective risk "burning cost" model (𝑃𝑢𝑟𝑒 𝑃𝑟𝑒𝑚𝑖𝑢𝑚 = 𝑀𝑒𝑎𝑛 𝐹𝑟𝑒𝑞𝑢𝑒𝑛𝑐𝑦 × 𝑀𝑒𝑎𝑛 𝑆𝑒𝑣𝑒𝑟𝑖𝑡𝑦). Econometric regressions were executed to identify socio-demographic and environmental covariates that drive annual medical shocks and gauge contingent valuation regarding daily premium thresholds. The empirical results reveal a baseline hospitalization frequency (λ) of approximately 0.30 admissions per vendor per year, with significant overdispersion driven by vendors with chronic, pre-existing conditions and poor sanitation access. Conditional on hospitalization, individual financial severity shocks averaged roughly UGX 175,000 to UGX 220,000 in direct medical costs, alongside an average productive loss of 5 to 10 working days per episode. The baseline actuarial annual pure premium required to cover hospitalization shocks was estimated, with risk-loaded adjustments demonstrating that an affordable daily micro-premium structure between UGX 500 and UGX 1,000 is actuarially viable. Contingent valuation analysis confirmed high demand, with over 70% of vendors indicating a strong willingness to buy into a daily premium model, preferring collection channels integrated with mobile money networks or local market leadership structures. The study concludes that setting up a daily-premium microinsurance scheme for Kampala's informal markets is both financially viable and highly demanded by vendors. It is recommended that micro-tier underwriters partner with telecommunications networks and local market administrations to deploy daily mobile money auto-deductions. This approach minimizes administrative costs, mitigates premium defaults, and effectively cushions informal urban workers against poverty traps caused by health shocks. Keywords: Microinsurance, Claim Frequency, Claim Severity, Poisson-Gamma Model, Contingent Valuation, Informal Sector, Kampala Market Vendors.