Adverse Selection in Term Life Insurance Purchasing due to the BRCA1/2 Genetic Test and Elastic Demand |
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| Authors: | Krupa S Viswanathan Jean Lemaire† Kate Withers‡ Katrina Armstrong§ Agnieszka Baumritter¶ John C Hershey# Mark V Pauly David A Asch†† |
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| Institution: | Krupa S. Viswanathan is at Temple University, 471 Ritter Annex (004-00), Philadelphia, PA 19122;. Jean Lemaire is at University of Pennsylvania, The Wharton School, Department of Insurance and Risk Management, Philadelphia, PA 19104;. Kate Withers is at the Georgetown University Law Center, Washington, DC 20001;. Katrina Armstrong is at the Department of Medicine, Center for Clinical Epidemiology and Biostatistics, University of Pennsylvania, Philadelphia, PA;. Agnieszka Baumritter is the Managing Director, Robert Wood Johnson Clinical Scholars Program, University of Pennsylvania, Philadelphia, PA;. John C. Hershey is at the Operations and Information Management Department, The Wharton School, University of Pennsylvania, Philadelphia, PA;. Mark V. Pauly is at The Wharton School, University of Pennsylvania, 208 Colonial Penn Center, Philadelphia, PA 19104;. David A. Asch is at the Department of Medicine and the Leonard David Institute for Health Economics, University of Pennsylvania, Philadelphia, PA, Center for Health Equity Research and Promotion, Philadelphia, VA Medical Center. The author can be contacted via e-mail: . |
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| Abstract: | Consumer groups fear that the use of genetic testing information in insurance underwriting might lead to the creation of an underclass of individuals who cannot obtain insurance; thus, these groups want to ban insurance companies from accessing genetic test results. Insurers contend that such a ban might lead to adverse selection that could threaten their financial solvency. To investigate the potential effect of adverse selection in a term life insurance market, a discrete‐time, discrete‐state, Markov chain is used to track the evolution of twelve closed cohorts of women, differentiated by family history of breast and ovarian cancer and age at issue of a 20‐year annually renewable term life insurance policy. The insurance demand behavior of these women is tracked, incorporating elastic demand for insurance. During the 20‐year period, women may get tested for BRCA1/2 mutations. Each year, the insurer calculates the expected premiums and expected future benefit payouts which determine the following year's premium schedule. At the end of each policy year, women can change their life insurance benefit, influenced by their testing status and premium changes. Adverse selection could result from (i) differentiated benefits following test results; (ii) differentiated lapse rates according to test results; and (iii) differentiated reactions to price increases. It is concluded that with realistic estimates of behavioral parameters, adverse selection could be a manageable problem for insurers. |
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