Economic Analysis of Insurance Fraud

We examine the effect of a Danish reform in 2002 that increased compensation for permanent loss of earnings capacity and extended the period when whiplash claimants could get compensation for temporary loss of earnings. The first is subject to extensive state verification by the government while the second is not. Using weekly data about disability, drug purchases, and use of health services during 1996-2007, we find that the reform increased the proportion on temporary disability by about 18 percent without a matching increase in drug purchases or the use of health services. We find no effect of compensation for permanent loss of earnings capacity. J. David Cassidy is at the

Section: Introductionsupporting

confidence: 91%

Section: Introductionmentioning

confidence: 99%

WHAT HAPPENS WHEN COMPENSATIONFOR WHIPLASH CLAIMS Is MADE MORE GENEROUS?

Cassidy

Leth‐Petersen

Rotger³

2016

“…One way in which insurers can work to mitigate the impact of misrepresentation and fraud is through claims auditing. There are numerous studies that investigate various aspects of auditing insurance claims (e.g., Dionne and St‐Michel, ; Kaplow, ; Schiller, ; Picard, , , ; Bond and Crocker, ; Boyer, ; Tennyson and Salsas‐Forn, ; Dionne, Giuliano, and Picard, ; Krawczyk, ). Picard () shows that insurers could benefit by transferring monitoring costs (i.e., audit expenses) to a budget‐balanced common agency.…”

Section: Literature Reviewmentioning

confidence: 99%

“…Misrepresentation and fraud are important issues across all lines in insurance and as such have been the subject of a great deal of research (e.g., Picard, , , ; Crocker and Tennyson, ; Derrig, ; Tennyson and Salsas‐Forn, ; Viaene and Dedene, ; Schiller, ; Krawczyk, ). Insurers use a variety of strategies to verify insured information in an effort to minimize misrepresentation and fraud costs.…”

Section: Introductionmentioning

confidence: 99%

POSTCLAIMUNDERWRITING AND THEVERIFICATION OFINSUREDINFORMATION: EVIDENCEFROM THELIFEINSURANCEINDUSTRY

Bisco

McCullough

Nyce³

2017

This research investigates information verification by life insurers with respect to postclaim underwriting through denied and resisted claims. We provide a theoretical model to explore the optimal strategy for insurers regarding preloss versus postclaim underwriting. Using differential cost structures, the model predicts that it is possible for some insurers to follow a strategy of postclaim underwriting while others do not. Evidence of this is found in the empirical analysis. Insurers that postclaim underwrite are identified by a decrease in underwriting expenses and an increase in the claim investigation expense in conjunction with increases in denied and resisted claims.

“…The modeling of the fraud portion of the game follows Picard, (), Boyer, (), and Bourgeon and Picard, (). See Picard, () for a survey of the literature.…”

mentioning

confidence: 99%

Insurance Fraud in a Rothschild–Stiglitz World

Boyer¹,

Peter²

2018

In this article, we model a competitive insurance market where policyholders privately have information about their probability of accident ex ante and know the state of the world ex post. We combine costly state verification without commitment and arguments from insurance contracting under adverse selection to characterize the resulting allocations. Insurance fraud convexifies the insurer's zero expected profit condition, which can lead to complete unraveling with low risks dropping out of the market. The standard case, however, involves rationing of low risks, which raises their probability of fraud and their success rate when committing it. As a result, adverse selection increases fraud in the economy. We also show that cross‐subsidization from low risks to high risks mitigates the fraud externality. Our results highlight that adverse selection and insurance fraud interact in nontrivial ways and have the potential to aggravate each other.