Multifactoral Genetic Disorders and Adverse Selection: Epidemiology Meets Economics

Insurance underwriting aims to identify risk factors that stratify customers into homogeneous groups, so that appropriate premiums can be charged for each group. However, use of genetic risk factors, over which individuals have no control, is controversial. But progress in genetic research is enabling better understanding of gene-environment interactions and associated multifactorial disorders. So, private and undisclosed genetic information may allow adverse selection, as insurers can only charge an average price. Adverse selection will occur if the lowest risk group decides against purchasing insurance when their expected utility of insurance falls below a certain threshold. We explore this boundary.