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Selection Bias and Auditing Policies for Insurance Claims

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  • Jean Pinquet
  • Mercedes Ayuso
  • Montserrat Guillén

Abstract

Selection bias results from a discrepancy between the range of estimation of a statistical model and its range of application. This is the case for fraud risk models, which are estimated on audited claims but applied on incoming claims in the design of auditing strategies. Now audited claims are a minority within the parent sample since they are chosen after a severe selection performed by claims adjusters. This article presents a statistical approach that counteracts selection bias without using a random auditing strategy. A two-equation model on audit and fraud (a bivariate probit model with censoring) is estimated on a sample of claims where the experts are left free to take the audit decision. The expected overestimation of fraud risk derived from a single-equation model is corrected. Results are close to those obtained with a random auditing strategy, at the expense of some instability with respect to the regression components set. Then we compare auditing policies derived from the different approaches. Copyright The Journal of Risk and Insurance, 2007.

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Article provided by The American Risk and Insurance Association in its journal Journal of Risk & Insurance.

Volume (Year): 74 (2007)
Issue (Month): 2 ()
Pages: 425-440

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Handle: RePEc:bla:jrinsu:v:74:y:2007:i:2:p:425-440

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  1. Dionne, G. & St-Michel, P. & Gibbens, A., 1993. "An Economic Analysis of Insurance Fraud," Cahiers de recherche 93010, Centre interuniversitaire de recherche en économie quantitative, CIREQ.
  2. Steven B. Caudill & Mercedes Ayuso & Montserrat Guillén, 2005. "Fraud Detection Using a Multinomial Logit Model With Missing Information," Journal of Risk & Insurance, The American Risk and Insurance Association, vol. 72(4), pages 539-550.
  3. Heckman, James, 2013. "Sample selection bias as a specification error," Applied Econometrics, Publishing House "SINERGIA PRESS", vol. 31(3), pages 129-137.
  4. Dionne, Georges & Gagne, Robert & Vanasse, Charles, 1998. "Inferring technological parameters from incomplete panel data," Journal of Econometrics, Elsevier, vol. 87(2), pages 303-327, September.
  5. Georges Dionne & Florence Giuliano & Pierre Picard, 2003. "Optimal Auditing for Insurance Fraud," Cahiers de recherche 0329, CIRPEE.
  6. El Bachir Belhadji & George Dionne & Faouzi Tarkhani, 2000. "A Model for the Detection of Insurance Fraud*," The Geneva Papers on Risk and Insurance - Issues and Practice, Palgrave Macmillan, vol. 25(4), pages 517-538, October.
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Cited by:
  1. Georges Dionne, 2012. "The Empirical Measure of Information Problems with Emphasis on Insurance Fraud and Dynamic Data," Cahiers de recherche 1233, CIRPEE.
  2. Bermúdez, Ll. & Pérez, J.M. & Ayuso, M. & Gómez, E. & Vázquez, F.J., 2008. "A Bayesian dichotomous model with asymmetric link for fraud in insurance," Insurance: Mathematics and Economics, Elsevier, vol. 42(2), pages 779-786, April.

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