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Contract design and insurance fraud: an experimental investigation

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  • Frauke von Bieberstein

    (Universitaet Bern, Institute for Organization and HRM)

  • Jörg Schiller

    (Universitaet Hohenheim, Institute for Health Care & Public Management)

Abstract

This paper experimentally examines the impact of contract design on insurance fraud. We test how fraud behavior varies for insurance contracts with full coverage, a straight deductible or claim-dependent premiums (bonus-malus contracts), in a setup where rational and selfish individuals have an incentive to always claim the maximum possible indemnity. We find a substantial impact of contractual arrangements: Deductible contracts lead to a greater extent to claim build-up than full coverage contracts. In contrast, bonus-malus contracts that entail the same net gains from fraud as deductible contracts do not increase claim build-up. Thus, our results indicate that bonus-malus contracts may be superior to deductible contracts for behavioral reasons.

Suggested Citation

  • Frauke von Bieberstein & Jörg Schiller, 2018. "Contract design and insurance fraud: an experimental investigation," Review of Managerial Science, Springer, vol. 12(3), pages 711-736, July.
    • Handle: RePEc:spr:rvmgts:v:12:y:2018:i:3:d:10.1007_s11846-017-0228-1
    DOI: 10.1007/s11846-017-0228-1
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    More about this item

    Keywords

    Insurance fraud; Experiment; Contract design; Deductible; Bonus-malus;
    All these keywords.

    JEL classification:

    • G22 - Financial Economics - - Financial Institutions and Services - - - Insurance; Insurance Companies; Actuarial Studies
    • C91 - Mathematical and Quantitative Methods - - Design of Experiments - - - Laboratory, Individual Behavior
    • D03 - Microeconomics - - General - - - Behavioral Microeconomics: Underlying Principles

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