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Advantageous Effects of Regulatory Adverse Selection in the Life Insurance Market* 

Authors


  • * 

    We thank two anonymous referees and David DeMeza (the editor) for very helpful comments, as well as seminar participants at the 2001 Risk Theory Society Seminar in Montreal, Australian National University, University of Melbourne and Iowa State University. We are also grateful for research funding of this project by SSHRC, CIHR, and Genome Canada.

Abstract

We analyse the effects of regulations prohibiting the use of information to risk-rate premiums in a life insurance market. New information derived from genetic tests is likely to become increasingly relevant in the future. Many governments prohibit the use of this information, thereby generating ‘regulatory adverse selection’. In our model, individuals early in their lives know neither their desired level of life insurance later in life nor their mortality risk, but learn both over time. We obtain both positive and normative results that differ qualitatively from those in standard, static models. Legislation prohibiting the use of genetic tests for ratemaking may increase welfare.

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