Welfare Effects of Banning Genetic Information in the Life Insurance Market: The Case of BRCA1/2 Genes

This paper is a contribution to the debate about whether regulations that ban insurance companies from access to individuals’ genetic tests may lead in the near to medium term future to substantial adverse selection costs. We choose the specific possibility of widespread knowledge based on genetic testing for the so-called breast cancer (BRCA1/2) genes. We use a data set including economic, demographic, and relevant family background information to simulate the market for 10-year term life insurance targeted at women aged 35 to 39. Using standard welfare economic analysis for various information and regulatory scenarios concerning genetic test results, we find generally only modest adverse selection costs associated with such a regulatory ban. However, for family background groups which are at high risk for carrying one of the BRCA1/2 genes, the efficiency cost of adverse selection may be significant especially if a large fraction of women within such groups were to obtain genetic test results. These results, therefore, suggest some caution in developing regulations which protect individuals’ genetic privacy.