Adverse Selection in Term Life Insurance Purchasing Due to the BRCA1/2 Genetic Test and Elastic Demand

22 Pages Posted: 4 Mar 2007

See all articles by Krupa S. Viswanathan

Krupa S. Viswanathan

Temple University - Department of Risk, Insurance, and Healthcare

Jean Lemaire

University of Pennsylvania - Statistics Department

Kate Withers

Georgetown University Law Center

Katrina Armstrong

University of Pennsylvania - Perelman School of Medicine

Agnieszka Baumritter

University of Pennsylvania - Robert Wood Johnson Health & Society Scholars Program

John C. Hershey

University of Pennsylvania - Operations & Information Management Department

Mark V. Pauly

University of Pennsylvania - Health Care Systems Department; National Bureau of Economic Research (NBER)

David A. Asch

University of Pennsylvania - The Wharton School

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.

Suggested Citation

Viswanathan, Krupa S. and Lemaire, Jean and Withers, Kate and Armstrong, Katrina and Baumritter, Agnieszka and Hershey, John C. and Pauly, Mark V. and Asch, David A., Adverse Selection in Term Life Insurance Purchasing Due to the BRCA1/2 Genetic Test and Elastic Demand. Journal of Risk & Insurance, Vol. 74, No. 1, pp. 65-86, March 2007. Available at SSRN: https://ssrn.com/abstract=967838 or http://dx.doi.org/10.1111/j.1539-6975.2007.00202.x

Krupa S. Viswanathan (Contact Author)

Temple University - Department of Risk, Insurance, and Healthcare ( email )

Fox School of Business and Management
1301 Cecil B. Moore Ave.
Philadelphia, PA 19122
United States

Jean Lemaire

University of Pennsylvania - Statistics Department ( email )

Wharton School
Philadelphia, PA 19104
United States

Kate Withers

Georgetown University Law Center ( email )

600 New Jersey Avenue, NW
Washington, DC 20001
United States

Katrina Armstrong

University of Pennsylvania - Perelman School of Medicine ( email )

423 Guardian Drive
1233 Blockley Hall
Philadelphia, PA 19104
United States

Agnieszka Baumritter

University of Pennsylvania - Robert Wood Johnson Health & Society Scholars Program ( email )

3641 Locust Walk
Philadelphia, PA 19104
United States

HOME PAGE: https://medley.isc-seo.upenn.edu/directory/jsp/fast.do;jsessionid=87BF272EE41E1550E80B342394451870

John C. Hershey

University of Pennsylvania - Operations & Information Management Department ( email )

Philadelphia, PA 19104
United States

Mark V. Pauly

University of Pennsylvania - Health Care Systems Department ( email )

3641 Locust Walk
208 Colonial Penn Center
Philadelphia, PA 19104-6358
United States

National Bureau of Economic Research (NBER)

1050 Massachusetts Avenue
Cambridge, MA 02138
United States

David A. Asch

University of Pennsylvania - The Wharton School ( email )

3641 Locust Walk
Philadelphia, PA 19104-6365
United States

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