Genetic Screening and Price Discrimination in Insurance Markets

Michael Hoy and Peter Lambert
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Peter Lambert: Department of Economics, University of York, United Kingdom

The Geneva Risk and Insurance Review, 2000, vol. 25, issue 2, 103-130

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, drawing 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. The Geneva Papers on Risk and Insurance Theory (2000) 25, 103–130. doi:10.1023/A:1008745627439

Date: 2000
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