Question II (about 60%):
a) Genetic factors may predispose persons to a particular health problem (implying a situation with different health risks e.g. low-risk individuals and high-risk individuals). Explain now what the equilibrium will be (type of insurance contracts) if the insurance company in such a world is fully informed (can identify each risk type) and the insurance premiums are actuarially fair.
To answer the above question, one may apply the concepts of expected wealth (EW) and expected utility (EU):
p is the probability of a loss occurring (e.g. due to an illness). is wealth in the good state; is wealth in the bad state, where L is the loss occurring in the bad state.
b) What would happen if insurance companies were less informed about individual risks than the individuals (the purchasers of insurances) themselves?
c) Finally, try and discuss whether it is desirable that insurance companies have full information, at an individual level, about genetic risk factors.