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Genetic Screening and Price Discrimination in Insurance Markets

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  • Michael Hoy

    (Department of Economics, University of Guelph, Ontario, Canada)

  • Peter Lambert

    (Department of Economics, University of York, United Kingdom)

Abstract

Basing insurance prices on the results of an imperfect screening test to identify risk types can reduce or increase aggregate discrimination across insureds. We present a powerful and general new framework of analysis to examine this issue, drawing upon recent work which uses decomposable inequality indices to measure vertical and horizontal inequity in taxation. We find that, whilst improved test performance inevitably reduces vertical discrimination (in the average prices faced by different risk types), even very accurate tests can lead to substantial horizontal discrimination (within risk types) and enhanced overall discrimination. These conclusions are shown to be robust to a range of different value judgements about how to aggregate individual discriminatory effects and to be particularly relevant to the case of genetic screening. The Geneva Papers on Risk and Insurance Theory (2000) 25, 103–130. doi:10.1023/A:1008745627439

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Bibliographic Info

Article provided by Palgrave Macmillan in its journal The Geneva Papers on Risk and Insurance Theory.

Volume (Year): 25 (2000)
Issue (Month): 2 (December)
Pages: 103-130

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Handle: RePEc:pal:genrir:v:25:y:2000:i:2:p:103-130

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References

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  1. Shorrocks, Anthony F, 1984. "Inequality Decomposition by Population Subgroups," Econometrica, Econometric Society, vol. 52(6), pages 1369-85, November.
  2. James A. Ligon & Paul D. Thistle, 1996. "Consumer Risk Perceptions and Information in Insurance Markets with Adverse Selection," The Geneva Risk and Insurance Review, Palgrave Macmillan, vol. 21(2), pages 191-210, December.
  3. Hoy, Michael, 1982. "Categorizing Risks in the Insurance Industry," The Quarterly Journal of Economics, MIT Press, vol. 97(2), pages 321-36, May.
  4. Bourguignon, Francois, 1979. "Decomposable Income Inequality Measures," Econometrica, Econometric Society, vol. 47(4), pages 901-20, July.
  5. Davies, James & Hoy, Michael, 1995. "Making Inequality Comparisons When Lorenz Curves Intersect," American Economic Review, American Economic Association, vol. 85(4), pages 980-86, September.
  6. Hoy, Michael & Polborn, Mattias, 2000. "The value of genetic information in the life insurance market," Journal of Public Economics, Elsevier, vol. 78(3), pages 235-252, November.
  7. Michael Hoy, 1984. "The Impact of Imperfectly Categorizing Risks on Income Inequality and Social Welfare," Canadian Journal of Economics, Canadian Economics Association, vol. 17(3), pages 557-68, August.
  8. Hoy, Michael, 1989. "The value of screening mechanisms under alternative insurance possibilities," Journal of Public Economics, Elsevier, vol. 39(2), pages 177-206, July.
  9. Cowell, F.A., 2000. "Measurement of inequality," Handbook of Income Distribution, in: A.B. Atkinson & F. Bourguignon (ed.), Handbook of Income Distribution, edition 1, volume 1, chapter 2, pages 87-166 Elsevier.
  10. Shorrocks, A F, 1980. "The Class of Additively Decomposable Inequality Measures," Econometrica, Econometric Society, vol. 48(3), pages 613-25, April.
  11. Cowell, Frank A, 1980. "On the Structure of Additive Inequality Measures," Review of Economic Studies, Wiley Blackwell, vol. 47(3), pages 521-31, April.
  12. Rothschild, Michael & Stiglitz, Joseph E, 1976. "Equilibrium in Competitive Insurance Markets: An Essay on the Economics of Imperfect Information," The Quarterly Journal of Economics, MIT Press, vol. 90(4), pages 630-49, November.
  13. Tabarrok, Alexander, 1994. "Genetic testing: An economic and contractarian analysis," Journal of Health Economics, Elsevier, vol. 13(1), pages 75-91, March.
  14. Lambert, P & Ramos, X, 1995. "Vertical redistribution and horizontal inequity," IFS Working Papers W95/01, Institute for Fiscal Studies.
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Cited by:
  1. Rob van der Noll, 2006. "The Welfare Effects of Discrimination in Insurance," Tinbergen Institute Discussion Papers 06-012/1, Tinbergen Institute.
  2. Michael Hoy & Michael Ruse, 2008. "“No Solution to This Dilemma Exists”: Discrimination, Insurance, and the Human Genome Project," Working Papers 0808, University of Guelph, Department of Economics and Finance.

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