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Genetic Screening and Price Discrimination in Insurance Markets

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  • Michael Hoy
  • Peter Lambert

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, rawing 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

Suggested Citation

  • Michael Hoy & Peter Lambert, "undated". "Genetic Screening and Price Discrimination in Insurance Markets," Discussion Papers 99/25, Department of Economics, University of York.
  • Handle: RePEc:yor:yorken:99/25
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    File URL: https://www.york.ac.uk/media/economics/documents/discussionpapers/1999/9925.pdf
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    References listed on IDEAS

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    1. Shorrocks, A F, 1980. "The Class of Additively Decomposable Inequality Measures," Econometrica, Econometric Society, vol. 48(3), pages 613-625, April.
    2. 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.
    3. Frank A. Cowell, 1980. "On the Structure of Additive Inequality Measures," Review of Economic Studies, Oxford University Press, vol. 47(3), pages 521-531.
    4. Hoy, Michael, 1989. "The value of screening mechanisms under alternative insurance possibilities," Journal of Public Economics, Elsevier, vol. 39(2), pages 177-206, July.
    5. Tabarrok, Alexander, 1994. "Genetic testing: An economic and contractarian analysis," Journal of Health Economics, Elsevier, vol. 13(1), pages 75-91, March.
    6. 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 557-568, August.
    7. 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.
    8. Shorrocks, Anthony F, 1984. "Inequality Decomposition by Population Subgroups," Econometrica, Econometric Society, vol. 52(6), pages 1369-1385, November.
    9. Davies, James & Hoy, Michael, 1995. "Making Inequality Comparisons When Lorenz Curves Intersect," American Economic Review, American Economic Association, vol. 85(4), pages 980-986, September.
    10. Bourguignon, Francois, 1979. "Decomposable Income Inequality Measures," Econometrica, Econometric Society, vol. 47(4), pages 901-920, July.
    11. 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;International Association for the Study of Insurance Economics (The Geneva Association), vol. 21(2), pages 191-210, December.
    12. Peter Lambert, & Xavier Ramos, 1995. "Vertical redistribution and horizontal inequity," IFS Working Papers W95/01, Institute for Fiscal Studies.
    13. Michael Hoy, 1982. "Categorizing Risks in the Insurance Industry," The Quarterly Journal of Economics, Oxford University Press, vol. 97(2), pages 321-336.
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    Cited by:

    1. Hoy, Michael & Huang, Rachel J., 2017. "Measuring discrimination using principles of stochastic dominance," Journal of Economic Theory, Elsevier, vol. 167(C), pages 39-52.
    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.

    More about this item

    Keywords

    insurance; genetic information; discrimination;

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