Abstract
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 (LSCs). The latter possibility is given some credence by the recent experience of “stranger-originated life insurance” (STOLI) in the United States. 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, LSCs would have to adopt a different business model, involving much longer time horizons. Third, STOLI is being effectively dealt with by the U.S. 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.
Original language | English |
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Pages (from-to) | 379-399 |
Number of pages | 21 |
Journal | Risk Management and Insurance Review |
Volume | 23 |
Issue number | 4 |
Early online date | 28 Nov 2020 |
DOIs | |
Publication status | Published - 11 Jan 2021 |
Keywords
- adverse selection
- genetic tests
- life settlement
- one-shot gamble
- stranger-originated life insurance
ASJC Scopus subject areas
- Accounting
- Finance
- Economics and Econometrics