Economic Analysis of Insurance Fraud

Abstract

Abstract:We survey recent developments in the economic analysis of insurance fraud. The paper first sets out the two main approaches to insurance fraud that have been developped in the literature, namely the costly state verification and the costly state falsification. Under costly state verification, the insurer can verify claims at some cost. Claims' verification may be deterministic or random, and it can be conditioned on fraud signals perceived by insurers. Under costly state falsification, the policyholder expends resources for the building-up of his or her claim not to be detected. We also consider the effects of adverse selection, in a context where insurers cannot distinguish honest policyholders from potential defrauders, as well as the consequences of credibility constraints on anti-fraud policies. Finally, we focus attention on the risk of collusion between policyholders and insurance agents or service providers. Keywords:Fraud, audit, verification, falsification, collusion, build-up. AbstractWe survey recent developments in the economic analysis of insurance fraud. The paper …rst sets out the two main approaches to insurance fraud that have been developped in the literature, namely the costly state veri…cation and the costly state falsi…cation. Under costly state veri…cation, the insurer can verify claims at some cost. Claims'veri…cation may be deterministic or random, and it can be conditioned on fraud signals perceived by insurers. Under costly state falsi…cation, the policyholder expends resources for the building-up of his or her claim not to be detected. We also consider the e¤ects of adverse selection, in a context where insurers cannot distinguish honest policyholders from potential defrauders, as well as the consequences of credibility constraints on anti-fraud policies. Finally, we focus attention on the risk of collusion between policyholders and insurance agents or service providers.

Expiration Dates in Automobile Insurance Contracts: The Curious Case of Last Policy Month Claims in Taiwan

“…We find that shares of claims are significantly higher in the last policy month. Motivated by concerns about the special environment of automobile insurance sales, the BMS, and an unethical attitude of the insured towards insurance premiums in Taiwan, we use an extensive data set to investigate the 19 Picard (2000). 20 Baumol (1967).…”

“…However, the nature of the incentive mechanism at play in our study is somewhat different from the one they describe. The case in 14 Mayers and Smith (1981) and Picard (2000) mention that independent agents are more likely to side with consumers when a claim is filed in order to secure a policy renewal from that consumer. 15 Some policyholders may even believe that agents have their best interest in mind when they propose filing excess claims, possibly as a carry-over of trust earned by the agents in their other roles.…”

“…10 Ma and McGuire (1997) construct an optimal insurance contract and payment system by taking into account false reporting from doctors and patients. Picard (2000) provides a model in which agents, in charge of marketing channels and not monitored by insurers, might collude with policyholders by offering advantageous contracts to compensate for low promotional efforts. Alger and Ma (2003) show that deterrence of consumer-provider collusion is not optimal unless the probability of collusion is large.…”

“…17 Mayers and Smith (1981). 18 Two major theoretical approaches to examine insurance fraud are costly state verification and costly state falsification (see Picard (2000) for a detailed survey).…”

Risk Aversion, Negotiation, and Claims Settlement Strategies

“…Following Picard (2000), Crocker and Tennyson (2002), and Loughran (2003) we develop a theoretical model of claims payment for compensating third-party claimants injured by insured defendant drivers. Our model predicts that risk averse claimants with higher negotiation costs receive lower claims payments from insured defendant drivers ceteris paribus.…”