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Insurance Basics

Insurance Basics. What is the economic function of insurance? E.g., (1) auto liability insurance; (2) life insurance. Usually we say that someone “insures against a risk.” Reducing risk increases wellbeing: Example. Probability of accident = 1/3. Cost of accident = $300.

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Insurance Basics

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  1. Insurance Basics • What is the economic function of insurance? E.g., • (1) auto liability insurance; (2) life insurance. • Usually we say that someone “insures against a risk.” • Reducing risk increases wellbeing: Example. • Probability of accident = 1/3. Cost of accident = $300. • If it costs $100 for a $300 payout in case of accident, then • (1) profit = 0, • (2) accident does not change the expected net income of the insured (expected net income is wage minus $100 whether or not there is an accident), but reduces the variance in the net income.

  2. Screening and Insurance • Two important issues in insurance (1) screening on probability of payout (2) “moral hazard” -- the insured will not be careful (moral hazard does not relate to genetics; won’t discuss) • Why do insurance rates differ for male and females drivers? • What’s the effect of banning “discrimination” in these rates? - possibly opt-out by females - redistribution from females to males. • With discrimination, insurance against two risks: (1) risk of accident and (2) risk of being male. Gender is like a genetic risk

  3. Insuring against Genetic Risk: • Examples: Huntington’s gene: 1 person in 20,000. Person dies for sure. BRCA1,2 occur in maybe 1% of population. Death risk comparable to being a smoker. • BRCA gene: Should price of health insurance (or life insurance) depend on whether insured has the gene? If no, what does breast-cancer insurance accomplish? If yes, what does breast-cancer insurance accomplish? (What risks are being insured?)

  4. Two kinds of risk • Before you are born: The risk has been resolved -- either you have a BRCA gene or not. • After you are born: The risk (whether you have an accident) will be resolved during your life. • Genetic risks are before-you-are-born risks. Male/Female (observable) BRCA gene (unobservable) sickle-cell anemia (partially observable due to race)

  5. Compare two insurance schemes (1) All the women in Berkeley get tested for BRCA gene, and insurance companies can observe outcome. (2) No woman gets tested, so all women have the same insurance rates. • What risks are being insured in the two schemes? - risk of being in the high-risk category (BRCA) ? - risk of environmentally-induced breast cancer ? • Alternatively, think of (2) as redistribution. • Now do the thought experiment for Huntington’s disease. Sickle-cell anemia

  6. Insurance policy questions • Should rates depend on genetics? What is “genetic discrimination?” • Should insurance companies be allowed to require genetic testing? • Should patients be allowed to have genetic information that they do not make available? • Should the government provide back-up insurance in parallel with private providers, to avoid “discrimination?” (What will happen?)

  7. Regulatory interventions(do these make sense?) • Massachusetts: tests must be “reliable” • Association of British Insurers: 5-year moratorium on using genetic tests for life insurance policies under £ 500,000 • Vermont: existing genetic info can be used, but new tests cannot be demanded. • Several states: guarantee rights to genetic privacy

  8. What does Nowlan have to say? • Insurance companies’ use of genetic info is not a big issue, because (1) Genetic predisposition does not matter much. (But what about Huntington’s? sickle-cell?) (2) Lack of genetic info has little impact because insurance contracts are short. When the bad news arrives (e.g., you got breast cancer?), rates can be raised. (Wow, what does he think insurance is for?) • Who is Nowlan, and does he have an economic interest?

  9. Some social goals:(How do they inform us about rules for insurance?) • Encourage people to know about genetic risks that can be managed? • Facilitate the well functioning of the insurance industry by not giving genetic information to patients? • Mitigate catastrophic loss. • Keep insurance companies in business. (Are they at risk with genetic testing?) • Social equity. What is social equity? (return to first slide)

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