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Life insurance is all about risk — the insurer assesses a policy based on likelihood of mortality, and the consumer is charged a premium rate based on complex actuarial tables. But the boom in direct-to-consumer DNA testing kits such as those offered by Google-backed 23andMe, can now give consumers a peek into a future that life insurers can't see.
Direct-to-consumer DNA kits, commonly used to track ancestry roots, increasingly allow individuals to assess their potential health risks by predicting genetic illnesses. DNA kit assessments like the "Genetic Health Report" that 23andMe has been providing are on the rise since the Food and Drug Administration approved the Google-backed company to assess risk for 10 genetic diseases. The report can recognize genetic variants associated with an increased risk of developing certain health conditions, including Late-Onset Alzheimer's or Parkinson's. It also provides a "Carrier Status" report, which determines if a customer carries a genetic variant for a health condition. The variant typically means the customer does not have the genetic disease, but shows they are prone to passing it down to their children.
For life insurers, a sector that banks on its ability to manage risk-taking when it comes to health, this new DNA era could mean an information disadvantage versus the consumer. The risk is theoretical at this point, but enough of a concern that it led bond rating agency Moody's Investor Service to warn in a recent report that DNA testing could become a credit negative rating for life insurers.
Many consumers and privacy watchdogs have expressed concerns about the use of DNA test results to deny health insurance, but there has been less attention paid to the potential influence this new consumer health technology will have over the life insurance policy market. Here are four key concepts that consumers should understand.
1. State laws protecting genetic information vary
Most life insurers are restricted by state laws from using genetic information in the underwriting process, which protect genetic results as a form of private property. That legal precedent is the foundation for Moody's argument that consumers have an advantage by being valued less risky than reality. But it is trickier than that. In fact, life insurers say that taking a direct-to-consumer genetic test may give them the upper hand.
Life insurers insist they can still request genetic information and retract an individual's contract if they hide test results, leading to debate over related state laws. Currently, 17 states have laws that restrict life insurers from using genetic information in the underwriting process, according to Moody's. Even in states not protected by such laws, life insurers do not explicitly ask for genetic information right now, Moody's said.
These laws go beyond the federal Genetic Information Nondiscrimination Act (GINA) which prevents genetic discrimination in the health insurance sector. The laws act similarly to GINA, which prohibits health insurers from requesting, requiring, or using genetic information to make decisions about eligibility for health insurance, premium rates, coverage terms.
Life insurers say such laws can be interpreted in different ways. The American Council of Life Insurers (ACLI) said there are no state laws barring an insurer from using existing results, and only two states prohibit requiring an applicant to take a genetic test for life insurance. If an individual does not give up their genetic information, the life insurer has "the right to void a policy," the ACLI said.
"Both the applicant and the insurer must 'put their cards on the table,'" the ACLI said in a statement to CNBC. Hiding genetic information would be contributing to what it deems adverse selection, according to the ACLI, and could affect the stability of a customer's contract later on.
"Life insurers rely on the honesty of applicants. The validity of a policy depends upon the full disclosure of all material information," ACLI said.
In addition, if a disease is serious, patients should be talking to medical experts. This means their conditions will be available on medical records and can be used by life insurers, according to the ACLI.
For policymakers, the purpose of the anti-genetic discrimination laws is clear: Genetic information is private, and using it to determine how much an individual should pay for insurance is a breach of privacy, and will lead to vast inequity in the insurance policy market.
'We all have pre-existing conditions,'' Brian McCall, a Republican insurance executive who wrote the law in Texas barring genetic discrimination, told The New York Times. ''We've just never been able to test for them with any accuracy. The purpose of insurance is to spread risk. But with genetic tests, insurance companies can virtually eliminate the guesswork in underwriting. They can seek out people who are genetically pure, creating a ghetto of the uninsured, because they will know who is likely to get a particular disease at a particular age.''
The ACLI says McCall's view is inaccurate and any insurer seeking only to cover the "genetically pure" would quickly be out of business. "A genetic test is only a marker of a future risk, and is certainly more insurable (e.g. less risk) than known disease," the ACLI said. Even so, insurers routinely offer policies to people with histories of cancer, diabetes, or heart disease.
2. Even favorable life insurance can come with a catch
Customers will most likely receive the better end of a deal if they are aware of genetic risks, according to experts. But certain packages can be more worth the deal than others.
With life insurance usually split into anywhere from 10 to 20 pricing tiers, customers are grouped in a particular class based on their level of risk. If a consumer buys a policy without disclosing genetic predispositions, consumers will most likely be valued as less risky than they should be, granting them slightly better premiums, said actuary and fee-only insurance advisor Scott Witt.
Customers should choose "term insurance" for the most prominent advantage, Witt said. Term insurance covers a fixed rate of payments for a limited period of time, potentially fitting for patients who are dealing with a deadline. But term insurance is also not a "sure thing," Witt said.
"Just because somebody has a predisposition toward something, there's no certainty they would die during the term insurance period," Witt said.
3. There may be more important life decisions to make
Witt said that merely learning about a genetic risk is "not necessarily going to be the deal breaker" in the type of insurance package a consumer chooses. And there may be other major life and financial decisions that offer more long-term security than trying to time the life insurance market.
If someone suddenly realizes they have no chance of making it past age 90, they might focus on other decisions, like investing their money or spending time with family, Witt said. They should also consider medical advances, which are occurring at an accelerating rate. If they splurge on insurance, but a medical breakthrough is made, they may regret their choice, Witt said.
"It's absolutely something in the short-term the consumer has some advantage," said Mark Cortazzo, senior partner of MACRO Consulting Group. But he added that it is unclear to him that a majority of consumers would take advantage of it. "If you have a breast cancer marker, I think my reaction to that is to have a radical mastectomy to save my life before it is to get life insurance. Utility is going to drive that — how valuable is your time, your money, your privacy?"
4. Life insurers may retaliate
If there are signs that genetic testing is working at odds with actuarial tables, life insurance companies can always respond by adjusting policies and rates.
"Insurance companies are very smart, it's always a cat and mouse game with these things," Cortazzo said. "There's ways to adjust for that."
Witt agreed. "If people need insurance, they need insurance," Witt said. "It's possible [DNA kits] could help tilt the odds in favor of the consumer in some instances. But in the grand scheme of things, it will even out. Insurance companies will adjust their rates accordingly and there will just be a redistribution."
Redistributions could mean higher premiums. A potential trade-off could be raising prices across-the-board but asking consumers to provide genetic information in return for a discount, Cortazzo said. Companies may also tell states if they want to see low rates, they should write laws to allow access to genetic information, he said.
The ACLI stated that hiding genetic information could add to everyone's cost if they "game the system" to their advantage and at the disadvantage of other policyholders.
"The 'pool' of insured policyholders eventually becomes financially unsound because the insurer is not collecting enough premiums to pay the higher rate of claims," the ACLI said.
The ACLI also points out that there are precedents for insurance prices going down and policies becoming more widely available as a result of policy holders taking more control over their health. Critics used to complain that it was unfair for life insurers to use applicants' cholesterol level in the underwriting process. Now, cholesterol is widely accepted as a health measurement and it has helped drive down the cost of insurance. People now typically take drugs to control their cholesterol. "Similarly, genetic information will in the future encourage people to take steps to prevent illness, or catch a disease early so that it can be treated," the ACLI said.
Most importantly, consumers should be aware of the private information they are giving up if they choose to go down this road.
"Understand what you are getting and giving up," Cortazzo said. "They're knowingly deliberate choices. It's when you don't know and don't understand, and this info is being gathered, that it becomes an issue."