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The Impact of Insurance Fraud Detection Systems

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  • Joerg Schiller

    (University of Hamburg)

Abstract

The purpose of this paper is to characterize the impact of fraud detection systems on the auditing procedure and the equilibrium insurance contract, when a policyholder can report a loss that never occurred. Insurers can only detect fraudulent claims through a costly audit (costly state verification). With a fraud detection system insurers can depend their audit on the signal of the system and auditing becomes more effective. This paper presents conditions under which insurance fraud and the resulting welfare losses can be reduced by the implementation of a costly fraud detection system that is supplied by an external third party.

Suggested Citation

  • Joerg Schiller, 2003. "The Impact of Insurance Fraud Detection Systems," Microeconomics 0309003, University Library of Munich, Germany, revised 02 Oct 2003.
    • Handle: RePEc:wpa:wuwpmi:0309003
    Note: Type of Document - none; prepared on PC; pages: 20 ; figures: included
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    References listed on IDEAS

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    1. Inés Macho-Stadler & David Pérez-Castrillo, 1999. "Auditing with Signals," CIE Discussion Papers 1999-08, University of Copenhagen. Department of Economics. Centre for Industrial Economics.
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    7. G. Dionne & F. Giuliano & P. Picard, 2002. "Optimal auditing for insurance fraud," THEMA Working Papers 2002-32, THEMA (THéorie Economique, Modélisation et Applications), Université de Cergy-Pontoise.
    8. Picard, Pierre, 1996. "Auditing claims in the insurance market with fraud: The credibility issue," Journal of Public Economics, Elsevier, vol. 63(1), pages 27-56, December.
    9. 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;The Geneva Association, vol. 25(4), pages 517-538, October.
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    Cited by:

    1. Suzanne H. Bijkerk & Vladimir A. Karamychev & Otto H. Swank, 2013. "Aggressive Reporting and Probabilistic Auditing in a Principles-Based Environment," Tinbergen Institute Discussion Papers 13-131/VII, Tinbergen Institute.
    2. Anthony Miyazaki, 2009. "Perceived Ethicality of Insurance Claim Fraud: Do Higher Deductibles Lead to Lower Ethical Standards?," Journal of Business Ethics, Springer, vol. 87(4), pages 589-598, July.
    3. Scalera Domenico & Zazzaro Alberto, 2007. "The Unpleasant Effects of Price Deregulation in the European Third-Party Motor Insurance Market: A Theoretical Framework," The B.E. Journal of Economic Analysis & Policy, De Gruyter, vol. 7(1), pages 1-30, October.
    4. Tajudeen Olalekan Yusuf, 2011. "Brokers' incentives and conflicts of interest in the control of opportunism," Journal of Risk Finance, Emerald Group Publishing, vol. 12(3), pages 168-181, May.
    5. Lu-Ming Tseng & Yue-Min Kang, 2015. "Managerial Authority, Turnover Intention and Medical Insurance Claims Adjusters’ Recommendations for Claim Payments," The Geneva Papers on Risk and Insurance - Issues and Practice, Palgrave Macmillan;The Geneva Association, vol. 40(2), pages 334-352, April.
    6. Pierre Picard, 2012. "Economic Analysis of Insurance Fraud," Working Papers hal-00725561, HAL.
    7. Georges Dionne, 2012. "The Empirical Measure of Information Problems with Emphasis on Insurance Fraud and Dynamic Data," Cahiers de recherche 1233, CIRPEE.
    8. Galeotti, Marcello & Rabitti, Giovanni & Vannucci, Emanuele, 2020. "An evolutionary approach to fraud management," European Journal of Operational Research, Elsevier, vol. 284(3), pages 1167-1177.
    9. Schiller, Jörg, 2004. "Versicherungsbetrug als ökonomisches Problem: Eine vertragstheoretische Analyse," Working Papers on Risk and Insurance 13, University of Hamburg, Institute for Risk and Insurance.
    10. Farbmacher, Helmut & Löw, Leander & Spindler, Martin, 2022. "An explainable attention network for fraud detection in claims management," Journal of Econometrics, Elsevier, vol. 228(2), pages 244-258.
    11. Boyer, M. Martin & Schiller, Jörg, 2003. "Merging automobile regulatory bodies: The case of Atlantic Canada," Working Papers on Risk and Insurance 11, University of Hamburg, Institute for Risk and Insurance.
    12. M. Martin Boyer & Jörg Schiller, 2003. "Merging Automobile Insurance Regulatory Bodies: The Case of Atlantic Canada," CIRANO Working Papers 2003s-70, CIRANO.
    13. Chiharu Ishida & Woojung Chang & Steve Taylor, 2016. "Moral intensity, moral awareness and ethical predispositions: The case of insurance fraud," Journal of Financial Services Marketing, Palgrave Macmillan, vol. 21(1), pages 4-18, March.
    14. Picard, Pierre, 2009. "Costly risk verification without commitment in competitive insurance markets," Games and Economic Behavior, Elsevier, vol. 66(2), pages 893-919, July.
    15. Kerstin Fiederling & Jörg Schiller & Frauke von Bieberstein, 2018. "Can we Trust Consumers’ Survey Answers when Dealing with Insurance Fraud?," Schmalenbach Business Review, Springer;Schmalenbach-Gesellschaft, vol. 70(2), pages 111-147, May.
    16. Bernardino, Wilton & Ospina, Raydonal & Souza, Filipe Costa de & Rêgo, Leandro & Pereira, Felipe, 2021. "Risk curves: A methodology to evaluate the risk of fraud by stock price manipulation based on game theory and detection software," Journal of Economics and Business, Elsevier, vol. 113(C).
    17. Jing Ai & Patrick L. Brockett & Linda L. Golden & Montserrat Guillén, 2013. "A Robust Unsupervised Method for Fraud Rate Estimation," Journal of Risk & Insurance, The American Risk and Insurance Association, vol. 80(1), pages 121-143, March.
    18. Nell, Martin & Schiller, Jörg, 2002. "Erklärungsansätze für vertragswidriges Verhalten von Versicherungsnehmern aus Sicht der ökonomischen Theorie," Working Papers on Risk and Insurance 7, University of Hamburg, Institute for Risk and Insurance.
    19. M. Martin Boyer & Richard Peter, 2020. "Insurance Fraud in a Rothschild–Stiglitz World," Journal of Risk & Insurance, The American Risk and Insurance Association, vol. 87(1), pages 117-142, March.
    20. Jill M. Bisco & Kathleen A. McCullough & Charles M. Nyce, 2019. "Postclaim Underwriting And The Verification Of Insured Information: Evidence From The Life Insurance Industry," Journal of Risk & Insurance, The American Risk and Insurance Association, vol. 86(1), pages 7-38, March.
    21. Bénédicte Coestier & Nathalie Fombaron, 2003. "L'audit en assurance," THEMA Working Papers 2003-41, THEMA (THéorie Economique, Modélisation et Applications), Université de Cergy-Pontoise.

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    More about this item

    Keywords

    insurance fraud; auditing; detection systems; costly state verification;
    All these keywords.

    JEL classification:

    • D - Microeconomics
    • G - Financial Economics

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