Adverse Selection in Genetic Insurance Markets

A new paper by Azevedo, Beauchamp, and Linnér (ABL) finds that some predictions are coming true and that may be a problem. Economists predicted that the Human Genome Project would uncover many markers for diseases that may not present themselves until much later. For two decades, these predictions were hard to come mainly because single-gene mutations are not as informative. ABL show that more recent improvements developed from data on nearly half a million people in the UK Biobank has become much more predictive. This affects insurance markets.

In many countries, but not the US, a market for Critical Illness Insurance (CII) is growing. 

Critical illness insurance (CII) pays out a lump sum in the event that the insured person gets diagnosed with any of the medical conditions listed on the policy (Brackenridge et al., 2006). The lump sum can be used as the policyholder wishes. The policy pays out once and is thereafter terminated.

Consumers with bad test results should gobble up insurance. CII providers will have to adjust rates for this adverse election. Consumers with good test results will not find the insurance worth it. Will CII providers require genetic tests? Will they be allowed to risk rate their policies? As the predictive power of genetic testing improves, as it surely will, these issues will become more acute.

Hat tip: Marginal Revolution