As with many rules, some of those who apply for the Schengen visa are unfortunately looking for ways to circumvent the rules regarding the travel insurance policy imposed by the Schengen countries. However, not only is it a bad idea, it is also illegal, and could lead to very serious consequences.
Some applicants purchase insurance for Europe travel just for the visa application, and then proceed to cancel it. However, this is a very dangerous practice, especially for those with passports from countries which have a history of emigration.
Consider the fictitious case of 22-year-old Arjun Shah, who traveled to Europe on a Schengen visa without insurance. While on a trip around Germany, his cab met with an accident. After emergency hospitalization, it was discovered that Shah did not possess any insurance whatsoever. Now, medical authorities can refuse any further treatment and refer him to the immigration department, citing violation of rules.
Authorities have the power to detain and question him, as well as deport him with a stamp on his record, so that he can never enter the Schengen region again, not even for transit. Porous borders do not mean lax rules, and there have been several instances of travelers being asked to leave the region for overstaying and not abiding by the rules.