Canberra, Monday 8 April 2002

The rising cost of genes

The future of the insurance industry depends critically upon the information contained in human genes. It will not be long before all consumers seeking life or disability income protection insurance may be required to undergo a series of genetic tests with results provided to the insurer, just as now they may have a medical examination.

Individuals with genetic information that indicates the likely onset of disease in the future may be refused life or disability income insurance or charged a significantly higher premium for coverage. This will mean that there will be an even wider range of premiums charged to those purchasing insurance cover.

Insurers are already classifying consumers into different risk groups depending on their personal characteristics. Age, sex, smoking status and occupation have all been used to determine a suitable premium rate for those seeking disability income protection insurance for many years. Another example is comprehensive motor vehicle insurance. The age of the insured and recent accident history are both used in determining the level of premium a person pays. Accessing further information about potential insureds through genes is therefore the logical next step in improving the premium rating calculations performed by insurers.

The obstacle to the use of genetic testing in financial services in the past has been the lack of suitable technology to produce sufficiently accurate test results. Recent advances in genetic medicine have seen a considerable improvement in accuracy. This improvement is projected to increase markedly throughout the 21st century. Although many people have not yet experienced genetic testing themselves, their genetic material will ultimately be tested in future generations - the modern equivalent of children suffering for the sins of their parents?

The success of insurance companies depends upon their ability to successfully predict the risk associated with individuals who seek insurance cover. If insurers are not pricing the risks appropriately they expose themselves to the danger of adverse selection (that is attracting all the higher risks to their insurance business). Consider an insurer that ignores the impact of smoker status in the calculation of premiums. The business of this insurance office will attract a large volume of smokers, and in turn claims costs will increase well above the premium rates charged. Insurance losses and eventual failure will result.

Precisely the same problem arises with genetic information. Customers of insurance companies can obtain their own personal genetic information. If such customers are allowed not to disclose this information to the insurer, they will have an information advantage over the insurer. The consumer will know more about the risk he or she presents than does the insurance company. The insurer will then be fighting a losing battle to set an appropriate premium structure. Adverse selection and large losses will be the inevitable result.

This information asymmetry, if not addressed by the financial services sector, has the potential to endanger the viability of insurance provision in the 21st century.

In April this year, one of the first meetings of professionals from law, genetic medicine and financial services will take place to address the delicate social, legal, scientific and financial implications of genetic testing on the future of insurance and other financial services. The conference is to be hosted by the Australian National University, in association with the Institute of Actuaries of Australia and the Securities Institute. Speakers will include Professor Grant Sutherland AO, one of Australia's foremost scientists, Chris Daykin, UK Government Actuary and Associate Professor Brian Opeskin, Australian Law Reform Commission. Justice Michael Kirby of the High Court will address the conference dinner.

For further details, you can visit the conference website http://ecocomm.anu.edu.au/Conference or contact the Centre for Actuarial Research at the ANU on (02) 6125 4508.

For interviews, papers or more information please contact:
David Service, ANU School of Finance and Applied Statistics, (02) 6125 4908 or 02 6255 7447 or 0411 117 999; Genevieve Turville, ANU Public Affairs, on (02) 6125 6125 or 0416 249 245

No 43/2002

© 2000 Marketing & Communications Division,
The Australian National University.
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Last Modified Tue, July 16, 2002