If life insurers are not permitted to use genetic test results in underwriting, they may face adverse selection. It is sometimes claimed that applicants will choose abnormally high sums insured as a form of financial gamble, possibly financed by life settlement companies. The latter possibility is given some credence by the recent experience of `stranger-originated life insurance' (STOLI) in the US. We examine these claims, and find them unconvincing for four reasons. First, apparently high mortality implies surprisingly high probabilities of surviving for decades, so the gamble faces long odds. Second, life settlement companies would have to adopt a different business model, involving much longer time horizons. Third, STOLI is being effectively dealt with by the US courts. Fourth, the gamble would be predicated upon a deep understanding of the genetic epidemiology, which is evolving, subject to uncertain biases, and cannot predict the emergence of effective treatments.
|Journal||Risk Management and Insurance Review|
|Publication status||Accepted/In press - 16 Nov 2020|
- Adverse selection
- Genetic Tests
- Life Settlement
- One-shot Gamble
- Stranger-originated Life Insurance