The Impact of Insurance Fraud Detection Systems

This article analyzes the impact of detection systems in an insurance fraud context. In a noncommitment Costly State Verification setting insurers can only detect fraudulent claims by performing costly audits, and policyholders are overcompensated by the optimal insurance contract. We show that audi...

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Bibliographic Details
Published inThe Journal of risk and insurance Vol. 73; no. 3; pp. 421 - 438
Main Author Schiller, Jörg
Format Journal Article
LanguageEnglish
Published Malden, USA Blackwell Publishing Inc 01.09.2006
Blackwell Publishing
The American Risk and Insurance Association
Blackwell Publishing Ltd
SeriesJournal of Risk & Insurance
Subjects
Auditing
Automobile insurance
Detection systems
Insurance claims
Insurance companies
Insurance contracts
Insurance fraud
Insurance industry
Insurance markets
Insurance premiums
Insurance providers
Policyholders
Studies
Tax audits
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Summary:This article analyzes the impact of detection systems in an insurance fraud context. In a noncommitment Costly State Verification setting insurers can only detect fraudulent claims by performing costly audits, and policyholders are overcompensated by the optimal insurance contract. We show that auditing becomes more effective and overcompensation can be reduced, when insurers are able to condition their audits on the information provided by detection systems.
Bibliography:ArticleID:JORI182
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This article was prepared while working at the Johann Wolfgang Goethe University (Frankfurt, Germany) and the University of Hamburg (Germany). I thank Klaus Bender, Richard Derrig, Uwe Focht, Jennifer Kirkland, Henrike Lesch, Martin Nell, Martin Peitz, Pierre Picard, Andreas Richter, Karin Senftleben, Andrea Seul, the anonymous referees and the participants of the 2003 annual ARIA meeting in Denver for their very helpful comments and suggestions on earlier versions of the article. Financial support of the “Förderkreis für die Versicherungslehre an der Johann Wolfgang Goethe‐Universität” and the “Verein zur Förderung der Versicherungswissenschaft in Hamburg” is gratefully acknowledged.
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ISSN:0022-4367
1539-6975
DOI:10.1111/j.1539-6975.2006.00182.x