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Contract design and insurance fraud: An experimental investigation

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  • Lammers, Frauke
  • Schiller, Jörg

Abstract

This paper investigates the impact of insurance contract design on the behavior of filing fraudulent claims in an experimental setup. We test how fraud behavior varies for insurance contracts with full coverage, a straight deductible or variable premiums (bonus-malus contract). In our experiment, filing fraudulent claims is a dominant strategy for selfish participants, with no psychological costs of committing fraud. While some people always commit fraud, a substantial share of people only occasionally or never defraud. In addition, we find that deductible contracts may be perceived as unfair and thus increase the extent of claim build-up compared to full coverage contracts. In contrast, bonus-malus contracts with variable insurance premiums significantly reduce the filing of fictitious claims compared to both full coverage and deductible contracts. This reduction cannot be explained by monetary incentives. Our results indicate that contract design significantly affects psychological costs and, consequently, the extent of fraudulent behavior of policyholders.

Suggested Citation

  • Lammers, Frauke & Schiller, Jörg, 2010. "Contract design and insurance fraud: An experimental investigation," FZID Discussion Papers 19-2010, University of Hohenheim, Center for Research on Innovation and Services (FZID).
    • Handle: RePEc:zbw:fziddp:192010
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    More about this item

    Keywords

    Insurance fraud; experiment; fairness; 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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