The following paragraph is from an article (The gene is out of the bottle; DNA and insurance The Economist; London Vol. 424, Iss. 9052,  (Aug 5, 2017): 62.)

"Once used only for medical reasons, basic predictive genetic tests can now be ordered online for a few hundred dollars. One company, 23andMe, in California, has collected some 4,000 litres of sputum since 2007, enlightening 2m people on their ancestry, health risks and what they may pass on to offspring. In April it received regulatory approval to screen for risk factors connected to ten diseases and genetic conditions, including late-onset Alzheimer's and Parkinson's. The ruling could open the floodgates for others to sell direct to consumers."

Required:

a)      Define two information asymmetry. (4 marks)

b)     IF a genetic test could tell whether a person is at increased risk of getting cancer or Alzheimer's, as such tests become more accessible, more and more people are taking the test. If the insurers have no equal access to the results, what kind of information asymmetry it will cause? (2 marks)

a)      Define two information asymmetry. 

Information asymmetric refers to a situation wherein a transaction there is unequal knowledge between each party involved. The moment the customer knows more than the insurer results into a nightmare of the industry. It is important to note that if the predictive tests further improve and it becomes more common while rules of non-disclosure stay in place, some insurance products might die eventually. Most insurers argue that if it happens that customers know something that is relevant concerning their health, insurers also should do so. There are two types of information asymmetry: moral hazard and adverse selection.

Step-by-step explanation

a)      Define two information asymmetry. 

Information asymmetric refers to a situation wherein a transaction there is unequal knowledge between each party involved. The moment the customer knows more than the insurer results into a nightmare of the industry. It is important to note that if the predictive tests further improve and it becomes more common while rules of non-disclosure stay in place, some insurance products might die eventually. Most insurers argue that if it happens that customers know something that is relevant concerning their health, insurers also should do so. There are two types of information asymmetry: moral hazard and adverse selection.

Adverse selection: this type refers to circumstances in which either sellers or buyers have information that the other group lacks. When these two groups are differently informed, there is the creation of asymmetric information.  The problem with information asymmetry usually occurs before the occurrence of a transaction. It is referred to as a pre-contractual problem.

Moral hazard refers to a situation in which one party seems to take more risks since the costs that could take place will not be borne by the party that takes the risk. This problem with information asymmetry usually takes place after the transaction.

If the insurers have no equal access to the results, what kind of information asymmetry it will cause?

The kind of information asymmetry that will be caused in this case is adverse selection. This is because even though insurers could access information, the degree of acquiring is not the same. Insurers have no equal access to the results hance this means some of the parties involved in transactions or activities will have more knowledge/information than the other.