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ABSTRACT
We investigate whether regulations that ban insurance companies from access to individuals' genetic tests are likely to lead to substantial adverse selection costs for the specific example of the so-called breast cancer (BRCA1/2) genes. Using a data set including economic, demographic, and relevant family background information to simulate the market for 10-year term life insurance, we find generally only modest adverse selection costs associated with such a regulatory ban. However, for family background groups that are at high risk for carrying one of these genes, the efficiency cost of adverse selection may be significant should the test become widely adopted.
INTRODUCTION
The debate on whether insurance companies should be allowed to use results of genetic tests for the purpose of assessing differential prices for health, life, or disability insurance has been very lively and increasingly relevant as genetic technology and lawmaking efforts are both progressing very rapidly.1 The U.S. Senate in 2003 passed the so-called Genetic Information Nondiscrimination Act (GINA) by a unanimous vote and the bill is waiting attention by the House. Although GINA restricts the use of genetic test results only for health insurance and employment purposes, many other countries extend restrictions to life and long-term disability insurance.2
Arguments in favor of restricting the use of genetic test results for rate-making purposes are generally based on concerns with equity and/or protection of privacy. Those who favor allowing insurance companies to use the information argue that not to do so would expose the market to serious adverse selection problems.3 There is a limited empirical literature, mostly based on actuarial simulations that estimate possible price effects for insurance that would result from a ban on the use of genetic test results for rate-making purposes (e.g., Macdonald, 2003; Macdonald and Pritchard, 2000, 2001). Although this is one important component of a full analysis of the associated adverse selection costs of such regulation, this work can be usefully supplemented by standard economic welfare analysis. In this article we provide such an analysis for the specific case of information relating to breast cancer, that is, the potential for genetic screening for the so-called breast cancer susceptibility genes (BRCA1/2 genes). The advantage of a standard welfare analysis is that it is based on a rational choice...