Living Economics

Insurance at Risk
Genetic test results on fatal diseases could lead to adverse selection of membership in life and health insurance if unfavorable results are concealed from insurers.

Accurate genetic test results plus increasing knowledge on the likely impact of genetic defects on specific diseases have thrown a monkey wrench into the market for life and health insurance. For example, research on a particular genetic disease, known as Huntington's disease (HD), has revealed that each offspring of a person with HD has a 50-50 chance of inheriting the fatal disease, and everyone who carries the gene will eventually develop the disease. On the surface, this knowledge seems to greatly benefit the insurers as they can now avoid risky customers or at least charge a higher premium.

But this is true only if the insurers have the right to know or if customers are not allowed to hide their test results. Why? Think of it this way. If life insurers were not allowed to know the test results, people of higher risks could greatly increase their coverage at the average-risk premium, while those at lower risk would buy less coverage. Thus, non-disclosure of genetic-test results could spell the end of the life-insurance market in a classic case of adverse selection1. It is for this reason that, this month, Britain became the first country in the world to allow insurers to ask for test results. This does not mean that insurers have the right to force anyone into taking the test, but if a potential customer has been tested, they insist on knowing.

So far, so good! But then insurance also relies, to a great extent, on risk pooling. By insuring enough people, insurance companies are relying on the fact that, on average, the payouts to the unexpectedly unhealthy policy holders will be offset by the premiums paid by the unexpectedly healthy. In an uncertain world, individuals are happy to go along with this and pool their risks with others. Since genetic testing promises to substantially reduce the degree of uncertainty, the genetically better-off may choose not to pool their risk with others, while the worse-off will find that they have become uninsurable (because of high premium). This could potentially reduce the pool to below the critical mass for actuarial viability.

But no matter how much genetic testing might reduce the uncertainty of fatal-disease incidence, there still exist other unforeseen medical and non-medical risks in human lives. For example, persons with a family history of HD might die of some other causes. In such cases, they just end up paying a whole lot of unnecessary premium. This same problem affects health insurance, because the expensive treatment for patients with HD must be covered before their certain eventual death. There is, therefore, more reason for health insurers to get hold of damaging genetic test results.

This insurance dilemma is, however, not unsolvable if some adjustment to existing life and health insurance policies are made. For example, insurance coverage could specifically exclude events related to the genetic defects. In other words, there would be no death benefits or only minimal medical treatment if death or illness were related to the genetic defects. With such exclusion, insurance premiums can still be affordable for other life and health events not directly related to the genetic defects. Without such coverage exclusion, even universal health insurance could go bankrupt, as life-extending but extremely expensive treatments are forthcoming.

Note:
  1. The tendency of people with higher risk wanting to be insured and people with lower risk wanting to opt out.
  2. The tendency of people with higher risk wanting to be insured and people with lower risk wanting to opt out.
References:
  • The Economist. "Testing times," 10/21/2000.
  • Fung K. K. 1998. "Decentralizing tragic choices: Pooling health risks with health unions," The American Journal of Economics and Sociology 57(3): 275-288.
  • The Guardian. "Insurers to take on government over gene tests," 10/13/2000.
  • Landon L. "Insurance giant wants your gene map...,"The Ottawa Citizen, 7/6/2000.
  • Scanlon B. "Gene tests: Who should know results?" Denver Rocky Mountain News, 7/24/2000.
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