This past weekend, I was in St Louis for a little mix of business and pleasure. I got to see some good friends and indulge in some good old fashioned intelligent conversation. Lately, issues of information inadequacy have been fascinating me, or rather, how technology is helping to fill in those gaps. Lawyers have begun using social networks to ascertain truth, companies like CarFax step in to improve information between buyers and sellers of cars, etc. The theory is that only when perfect information exists can the true value of anything be ascertained.
Which got me thinking about the insurance industry…a business inherently based on imperfect information. Using what little information they know about you and the statistical average of what happens to individuals like you, insurance companies can effectively “price” you. The problem is that the less they know about you as an individual and your inherent risks, the higher the buffer they have to price into your policy. This is why policies reward you for displaying risk averse behaviors such as joining a gym, driving safely or quiting smoking. The more they know about you, the fairer your price can be (notice I say fairer, not necessarily lower).
So riddle me this. Now that genetic tests are becoming more prevelant, shouldn’t we want everyone to take one? The more information that we know about everyone, can’t we get to a fairer insurance rate for everyone? And as a benefit, theoretically, as a whole, rates should be lower. The one enormous problem I see is that if insurance companies can deny coverage, which doesn’t seem fair given that people are divulging this information…rates should just respond accordingly.
What do you guys think?