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Fraudulent Claims and Nitpicky Insurers

Author

Listed:
  • Jean-Marc Bourgeon
  • Pierre Picard

Abstract

Insurers have the reputation of being bad payers who nitpick when- ever an opportunity arises. However, this nitpicking activity has a positive impact on their auditing strategy since auditing may prove profitable when claims are not fraudulent. We show that reducing the indemnity payments of audited claims induces a lower fraud rate at equilibrium and that some degree of nitpicking is socially optimal when insurance fraud is a concern. Its remains optimal even if it induces adverse effects on policyholders' moral standards.

Suggested Citation

  • Jean-Marc Bourgeon & Pierre Picard, 2014. "Fraudulent Claims and Nitpicky Insurers," American Economic Review, American Economic Association, vol. 104(9), pages 2900-2917, September.
  • Handle: RePEc:aea:aecrev:v:104:y:2014:i:9:p:2900-2917
    Note: DOI: 10.1257/aer.104.9.2900
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    References listed on IDEAS

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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. Finkle, Aaron & Shin, Dongsoo, 2007. "Conducting inaccurate audits to commit to the audit policy," International Journal of Industrial Organization, Elsevier, vol. 25(2), pages 379-389, April.
    3. Xavier Gabaix & David Laibson, 2018. "Shrouded attributes, consumer myopia and information suppression in competitive markets," Chapters,in: Handbook of Behavioral Industrial Organization, chapter 3, pages 40-74 Edward Elgar Publishing.
    4. Danial P. Asmat & Sharon Tennyson, 2014. "Does the Threat of Insurer Liability for “Bad Faith” Affect Insurance Settlements?," Journal of Risk & Insurance, The American Risk and Insurance Association, vol. 81(1), pages 1-26, March.
    5. 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.
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    7. Michal Krawczyk, 2009. "The Role of Repetition and Observability in Deterring Insurance Fraud," The Geneva Risk and Insurance Review, Palgrave Macmillan;International Association for the Study of Insurance Economics (The Geneva Association), vol. 34(1), pages 74-87, June.
    8. Keith J. Crocker & John Morgan, 1998. "Is Honesty the Best Policy? Curtailing Insurance Fraud through Optimal Incentive Contracts," Journal of Political Economy, University of Chicago Press, vol. 106(2), pages 355-375, April.
    9. Crocker, Keith J & Tennyson, Sharon, 2002. "Insurance Fraud and Optimal Claims Settlement Strategies," Journal of Law and Economics, University of Chicago Press, vol. 45(2), pages 469-507, October.
    10. Dilip Mookherjee & Ivan Png, 1989. "Optimal Auditing, Insurance, and Redistribution," The Quarterly Journal of Economics, Oxford University Press, vol. 104(2), pages 399-415.
    11. Fahad Khalil, 1997. "Auditing Without Commitment," RAND Journal of Economics, The RAND Corporation, vol. 28(4), pages 629-640, Winter.
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    13. 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.
    14. Georges Dionne & Florence Giuliano & Pierre Picard, 2009. "Optimal Auditing with Scoring: Theory and Application to Insurance Fraud," Management Science, INFORMS, vol. 55(1), pages 58-70, January.
    15. 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.
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    Citations

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    Cited by:

    1. Martin Boyer & Philippe De Donder & Claude Fluet & Marie-Louise Leroux & Pierre-Carl Michaud, 2017. "Long-Term Care Insurance: Knowledge Barriers, Risk Perception and Adverse Selection," NBER Working Papers 23918, National Bureau of Economic Research, Inc.
    2. Jean-Marc Bourgeon & Pierre Picard, 2018. "Insurance Law and Incomplete Contracts," Working Papers hal-01830360, HAL.
    3. Jean-Marc Bourgeon & Pierre Picard, 2017. "Nitpicky Insurers and the Law of Contracts," CESifo Working Paper Series 6669, CESifo Group Munich.
    4. Pierre Picard, 2012. "Economic Analysis of Insurance Fraud," Working Papers hal-00725561, HAL.
    5. Georges Dionne, 2012. "The Empirical Measure of Information Problems with Emphasis on Insurance Fraud and Dynamic Data," Cahiers de recherche 1233, CIRPEE.
    6. Eric Stephens & James R. Thompson, 2015. "Separation Without Exclusion in Financial Insurance," Journal of Risk & Insurance, The American Risk and Insurance Association, vol. 82(4), pages 853-864, December.

    More about this item

    JEL classification:

    • D86 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Economics of Contract Law
    • G22 - Financial Economics - - Financial Institutions and Services - - - Insurance; Insurance Companies; Actuarial Studies
    • K12 - Law and Economics - - Basic Areas of Law - - - Contract Law
    • K42 - Law and Economics - - Legal Procedure, the Legal System, and Illegal Behavior - - - Illegal Behavior and the Enforcement of Law

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