Genetic Testing and Insurance: The Complexity of Adverse Selection

The debate on whether insurance companies should be allowed to use results of individuals’ genetic tests for underwriting purposes has been both lively and increasingly relevant over the past two decades. Yet there appears to be no widely agreed upon resolution regarding appropriate and effective regulation. There exists today a gamut of recommendations and actual practices addressing this phenomenon ranging from laissez faire to voluntary industry moratoria to strict legal prohibition. One obvious reason for such a variance in views and approaches is that there are competing norms for evaluating the outcomes of restricting insurers’ use of such information. For example, an outright ban on the use of genetic test results may seem the best method for protecting against unfair discrimination while allowing their use may seem to be the best way to foster efficiency in the market for insurance. However, there is also a lack of understanding about how restricting the use of genetic information would play out in the market through the so-called phenomenon of adverse selection. Using economic analysis, we discuss how the type of adverse selection that occurs in insurance markets affects various arguments both in favour and against an outright ban on insurers’ use of genetic tests for pricing insurance. We review arguments based on moral principles (i.e., a concern with unfair discrimination as well as welfarist analysis related to distributive justice). The practical concerns from the insurance industry based on actuarial principles and economic efficiency are also compared. Each perspective is shown to lead to a range of conflicting recommendations about how genetic information should be regulated and these conclusions depend critically on whether one conducts the analysis from the ex ante temporal perspective (i.e., before individuals know their risk type), from the interim temporal perspective (i.e., after individuals know their risk type but before they purchase their insurance policies), or from the ex post temporal perspective (i.e., after all uncertainty is resolved including the claims status of each policyholder).