Genetic Testing Poses Adverse Selection Dilemma

January 3, 2001

When British health officials agreed to let insurers seek information from applicants concerning Huntington’s Chorea, a rare genetically related disease, they may have allowed a new, and potentially serious, variable to affect insurers’ risk calculations.

An article in London’s Financial Times discusses the possible consequences of genetic testing as related to life and annuity risks. In essence the FT concludes that giving potential insureds more information concerning their individual health risks than their insurers poses a real dilemma.

If the information can be withheld, insurers would suffer increased “adverse risk selection,” i.e. people who know they have a serious health problem will seek and obtain greater insurance protection, which will ultimately result in higher losses.

On the other hand, allowing insurers free access to health information would make many people uninsurable, either because coverage could be refused outright, or rates would be set at exorbitant levels. The only alternative would be government programs for such individuals.

The article points out that a study which examined over 40,000 annuity policies over a 17-year period concluded that those who chose annual payment increases tended to live longer than those who chose uniform payments. The difference in mortality rates was as significant as the difference between men and women.

The increasing use and availability of genetic testing means that the problems connected with “adverse risk selection” are going to increase. The article concludes that paradoxically more information may actually cause more problems than it will solve for both the insurers and the insured.

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