Should insurance companies have complete access to individuals’ genetic test results for
the purpose of setting rates for life, health and critical illness insurance? Not according to
economics professors Mattias Polborn, Michael Hoy and Asha Sadanand, whose
research, published in the January 2006 issue of the Economic Journal, suggests that
some restrictions may be desirable.
The study also demonstrates that the most useful type of regulation is one like the UK
approach, which establishes a ceiling on the cumulative amount of life insurance purchases
that an individual can hold without insurers being allowed to use genetic test results in
setting premiums.
Such a cap mitigates the costs of 'adverse selection' while still providing individuals who are
at higher risk with an opportunity to purchase insurance at a reasonable price.
Adverse selection is the phenomenon where individuals who know that their risk level is
high will buy more insurance than low risk individuals – which implies that the average risk
level of insurance purchasers is higher than that of the population as a whole.
This forces insurance companies to raise prices, which drives even more low risk types out
of the market – and so on. The effect may even lead to the complete collapse of certain
lines of insurance. It is for this reason that economists are usually critical of any regulation
that leads to 'asymmetric information', and hence adverse selection.
However, Professors Polborn, Hoy and Sadanand argue
that this problem may not be very severe in the context of genetic information in the life
insurance market. Moreover, prohibiting insurers from using genetic information about risk
type may be useful despite the fact that such regulations create some adverse selection
costs.
The reason is that such a regulation effectively provides ‘insurance’ against unfavourable
news about one's genetic type. With regulation, people who have a ‘bad’ gene type will still
be able to buy insurance at a relatively low price.
A welfare improvement through regulation is particularly likely when relatively few
individuals have genes that increase their risk substantially, a setting that describes most
genetic illnesses known today very accurately.
Currently, regulations differ widely across countries. Austria, Denmark and Norway, for
example, prohibit insurers from requesting or using the test results of applicants that are
available in medical records.
Legislation in Belgium takes an even stricter stance: insurance applicants are prohibited
from even voluntarily submitting favourable results of genetic tests to insurers.
In the UK, a moratorium is in place until November 2006 that prohibits basing premiums for
life insurance applications under £500,000 (and for critical illness and income insurance
under £300,000) on genetic test results. Moreover, the Genetics and Insurance
Commission (GAIC) reviews applications by the Association of British Insurers (ABI) to
determine which tests can be used for applications exceeding £500,000.
Thus far, the only disease for which a genetic test has been approved for use by insurers is
Huntington’s Disease. But it is expected that soon applications will be made by the ABI for
use of adverse results from predictive tests of the BRCA1 and BRCA2 genes (the so-called
breast cancer genes) for premium determination in life and critical illness. See the GAIC
website: http://www.advisorybodies.doh.gov.uk/genetics/gaic/
ENDS
Notes for editors: ‘Advantageous Effects of Regulatory Adverse Selection in the Life
Insurance Market’ by Mattias Polborn, Michael Hoy and Asha Sadanand is published in the
January 2006 issue of the Economic Journal.
Mattias Polborn is at the University of Illinois. Michael Hoy and Asha Sadanand are at the
University of Guelph.
For further information: contact RES Media Consultant Romesh Vaitilingam on 0117-983-
9770 or 07768-661095 (email: romesh@compuserve.com); or Michael Hoy (email:
mhoy@uoguelph.ca), Asha Sadanand (email: asadanan@uoguelph.ca) or Mattias Polborn
(email: polborn@uiuc.edu).