This paper is concerned with medical insurance which is one of the potential contributory factors in risk sharing tool. This research evaluates the medical insurance’s risk sharing function in rural China during the economic transition period because it decreases food consumption variance to face the household idiosyncratic shock. In this research, the income elasticity was estimated.

Chinese rural households like in other developing countries are exposed to unpredicted risks under uncertain economy and imperfect market. With this, there are risks of losing income. One of the main causes of poverty is consumption shock due to unstable income. Income shocks usually manifest idiosyncratic shocks. This can be understood as a form of idiosyncratic shock, a kind of malnutrition that disturbs consumption smoothing. If one of the communities have a risk sharing system, where it balances or disperses the risks for such shocks, then it helps alleviate the level of poverty.

The CHNS long-term panel data was used throughout the study. For estimating the potential insurance function of rural medical insurances, the application of the instrument variable method was utilized in consideration of the endogenous problems of measurement error, omitted variable, and selection bias.

Based on the analysis, three hypothesis results were verified: (1) The full risk sharing test was conducted and performed for evaluation. Results showed that, food consumption was not completely isolated from income fluctuations, but it has a relatively strong risk sharing mechanism compared to other developing countries in rural China. (2) Various medical insurances have proven its potential risk sharing function in intra-villages, on the account that they don’t have to worry about expensive medical fees in facing the idiosyncratic shock and what makes the food consumption stable up to 60% to 70%. (3) Based on the results before 2009, intra-villages have higher medical risk sharing function than other medical insurances. However, in 2009, there was a drastic change in medical insurances role. Community relationship ties that has been weaken due to the progress of urbanization. On the other hand, a top-down reform in 2007 and has a positive effect in extending the scope of risk pooling and social solidarity, thus promoting social integration. Currently, it shows that public social safety net is used instead of traditional life security which is the intra-villages risk sharing system.