Insurance and Human Genetics: Insurance Market Perspective

Abstract Suppose individuals have information from genetic tests concerning their mortality or morbidity risk and insurers are not allowed access to it. Higher risks will view insurance as a ‘better deal’ than will lower risks when the price is the same for all and so higher risk consumers will be inclined to purchase more insurance than those with lower risk. The result will be upward pressure on the average market price for insurance. Insurers will react by either raising price or tailoring insurance policies to separate the two types of consumers. In this article, the implications on consumer well‐being in such an economic environment are described and compared to the outcome where insurers are allowed to use the results of genetic tests to price insurance accordingly. Key Concepts: If insurance companies do not have access to genetic test results of their potential customers, then this creates a situation of asymmetric information and a problem of adverse selection. Since ‘bad risks’ will desire more insurance than ‘good risks’ if the price is the same for all, then insurers would end up selling more insurance to the bad risks and so the overall price of insurance may rise as a result. Adverse selection may also result in screening strategies whereby insurers offer higher coverage at a higher unit price in order to attract high risk types with lower risk types enduing up with less insurance coverage. Allowing insurers access to genetic test results leads to greater efficiency of the insurance market but may also create a potential genetic underclass; that is, people who face very high prices for insurance or no insurance at all. Economic models of insurance markets allow one to understand the tradeoffs between effective (efficient) operation of insurance markets and equity concerns.