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Fraudulent Claims and Nitpicky Insurers

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Author Info

  • Jean-Marc Bourgeon

    (Institut National de la Recherche Agronomique - INRA, Department of Economics, Ecole Polytechnique - CNRS : UMR7176 - Polytechnique - X)

  • Pierre Picard

    (Department of Economics, Ecole Polytechnique - CNRS : UMR7176 - Polytechnique - X)

Abstract

Insurance fraud is a major source of inefficiency in insurance markets. A self-justification of fraudulent behavior is that insurers are bad payers who start nitpicking if an opportunity arises, even in circum- stances where the good-faith of policyholders is not in dispute. We relate this nitpicking activity to the inability of insurers to commit to their auditing strategy. Reducing the indemnity payments acts as an incentive device for the insurer since auditing is profitable even if the claim is not fraudulent. We show that optimal indemnity cuts are bounded above and that nitpicking remains optimal even if it induces adverse effects on policyholders' moral standards.

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Bibliographic Info

Paper provided by HAL in its series Working Papers with number hal-00675106.

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Date of creation: 29 Feb 2012
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Handle: RePEc:hal:wpaper:hal-00675106

Note: View the original document on HAL open archive server: http://hal.archives-ouvertes.fr/hal-00675106
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Related research

Keywords: Insurance Fraud; audit; no-commitment; nitpicking.;

This paper has been announced in the following NEP Reports:

References

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  1. M. Martin Boyer, 2004. "Overcompensation as a Partial Solution to Commitment and Renegotiation Problems: The Case of "Ex Post" Moral Hazard," Journal of Risk & Insurance, The American Risk and Insurance Association, vol. 71(4), pages 559-582.
  2. Strutton, David & Vitell, Scott J. & Pelton, Lou E., 1994. "How consumers may justify inappropriate behavior in market settings: An application on the techniques of neutralization," Journal of Business Research, Elsevier, vol. 30(3), pages 253-260, July.
  3. Georges Dionne & Florence Giuliano & Pierre Picard, 2005. "Optimal Auditing with Scoring Theory and Application to Insurance Fraud," Working Papers hal-00243026, HAL.
  4. Tennyson, Sharon, 1997. "Economic institutions and individual ethics: A study of consumer attitudes toward insurance fraud," Journal of Economic Behavior & Organization, Elsevier, vol. 32(2), pages 247-265, February.
  5. Picard, Pierre, 1994. "Auditing claims in insurance market with fraud : the credibility issue," CEPREMAP Working Papers (Couverture Orange) 9420, CEPREMAP.
  6. Laibson, David I. & Gabaix, Xavier, 2006. "Shrouded Attributes, Consumer Myopia, and Information Suppression in Competitive Markets," Scholarly Articles 4554333, Harvard University Department of Economics.
  7. Georges Dionne & Robert Gagné, 2001. "Deductible Contracts Against Fraudulent Claims: Evidence From Automobile Insurance," The Review of Economics and Statistics, MIT Press, vol. 83(2), pages 290-301, May.
  8. Michal Krawczyk, 2009. "The Role of Repetition and Observability in Deterring Insurance Fraud," The Geneva Risk and Insurance Review, Palgrave Macmillan, vol. 34(1), pages 74-87, June.
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Citations

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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. Pierre Picard, 2012. "Economic Analysis of Insurance Fraud," Working Papers hal-00725561, HAL.

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