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Insurance Fraud Estimation: More Evidence from the Quebec Automobile Insurance Industry

Author

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  • Caron, Louis

    (HEC Montreal, Canada Research Chair in Risk Management)

  • Dionne, Georges

    (HEC Montreal, Canada Research Chair in Risk Management)

Abstract

This article follows a previous study on insurance fraud in the Quebec automobile insurance industry (Dionne and Belhadji, 1996). Results from that research showed that 3 to 6.4% of all claim payments (excluding those for "glass damage only") contained fraud, representing 28 to 61 million dollars in 1994-1995. This evaluation was a minimum since it was limited to observed fraud only. In this paper, we apply a statistical method to estimate the total fraud level in the industry for the same period. Our results show a multiplicative factor of 3.4% of fraudulent files found in Dionne and Belhadji, which means that total fraud payments ranged from 96.2 to 208.4 million dollars in 1994-1995. Our Best Guess Estimator yields roughly a 10% fraud rate or about 113.5 million dollars. An interesting corollary in this finding is that the claim adjusters who participated to the survey (representing 70% of the market), observed only 1/3 of the potential frauds in the studied closed files. One can interpret this number as an index of efficiency for the entire verification process in the industry. A natural question is: Why is this index of efficiency so low?

Suggested Citation

  • Caron, Louis & Dionne, Georges, 1997. "Insurance Fraud Estimation: More Evidence from the Quebec Automobile Insurance Industry," Working Papers 96-2, HEC Montreal, Canada Research Chair in Risk Management.
    • Handle: RePEc:ris:crcrmw:1996_002
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    References listed on IDEAS

    as
    1. 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.
    2. Dionne, Georges & St-Michel, Pierre, 1991. "Workers' Compensation and Moral Hazard," The Review of Economics and Statistics, MIT Press, vol. 73(2), pages 236-244, May.
    3. J. David Cummins & Sharon Tennyson, 1992. "Controlling Automobile Insurance Costs," Journal of Economic Perspectives, American Economic Association, vol. 6(2), pages 95-115, Spring.
    4. Dionne, G. & St-Michel, P. & Vanasse, C., 1989. "Moral Hazard, Optimal Auditing And Workers' Compensation," Cahiers de recherche 8941, Centre interuniversitaire de recherche en économie quantitative, CIREQ.
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    Citations

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    Cited by:

    1. Dionne, Georges, 2000. "The Empirical Measure of Information Problems with Emphasis on Insurance Fraud," Working Papers 00-4, HEC Montreal, Canada Research Chair in Risk Management.
    2. M. Martin Boyer, 2007. "Resistance (to Fraud) Is Futile," Journal of Risk & Insurance, The American Risk and Insurance Association, vol. 74(2), pages 461-492, June.
    3. Cohen Alma, 2006. "The Disadvantages of Aggregate Deductibles," The B.E. Journal of Economic Analysis & Policy, De Gruyter, vol. 6(1), pages 1-28, April.
    4. 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).
    5. Dionne, Georges, 1998. "La mesure empirique des problèmes d’information," L'Actualité Economique, Société Canadienne de Science Economique, vol. 74(4), pages 585-606, décembre.
    6. 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.
    7. Chu-Shiu Li & Chwen-Chi Liu & Sheng-Chang Peng, 2013. "Expiration Dates in Automobile Insurance Contracts: The Curious Case of Last Policy Month Claims in Taiwan," The Geneva Risk and Insurance Review, Palgrave Macmillan;International Association for the Study of Insurance Economics (The Geneva Association), vol. 38(1), pages 23-47, March.
    8. Akın, Zafer, 2023. "Direct lying or playing the victim? An experimental study," Journal of Economic Behavior & Organization, Elsevier, vol. 216(C), pages 150-169.
    9. Georges Dionne, 2012. "The Empirical Measure of Information Problems with Emphasis on Insurance Fraud and Dynamic Data," Cahiers de recherche 1233, CIRPEE.
    10. Herweg, Fabian & Müller, Daniel, 2008. "The Optimality of Simple Contracts: Moral Hazard and Loss Aversion," Bonn Econ Discussion Papers 17/2008, University of Bonn, Bonn Graduate School of Economics (BGSE).
    11. 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.
    12. Lang, Matthias & Wambach, Achim, 2013. "The fog of fraud – Mitigating fraud by strategic ambiguity," Games and Economic Behavior, Elsevier, vol. 81(C), pages 255-275.
    13. Dionne, Georges & Gagne, Robert, 2002. "Replacement Cost Endorsement and Opportunistic Fraud in Automobile Insurance," Journal of Risk and Uncertainty, Springer, vol. 24(3), pages 213-230, May.
    14. 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.
    15. Donatella Porrini, 2002. "Frodi nell'assicurazione RC Auto: analisi economica e possibili rimedi," Rivista di Politica Economica, SIPI Spa, vol. 92(2), pages 109-138, March-Apr.
    16. Domenico SCALERA & Alberto ZAZZARO, 2004. "From regulation to free market: the experience of the European motor insurance market," Working Papers 205, Universita' Politecnica delle Marche (I), Dipartimento di Scienze Economiche e Sociali.
    17. Stijn Viaene & Guido Dedene, 2004. "Insurance Fraud: Issues and Challenges," The Geneva Papers on Risk and Insurance - Issues and Practice, Palgrave Macmillan;The Geneva Association, vol. 29(2), pages 313-333, April.
    18. Akin, Zafer, 2022. "Playing the victim behavior: an experimental study," MPRA Paper 115532, University Library of Munich, Germany.
    19. Richard Watt, 2003. "Curtailing Ex-Post Fraud in Risk Sharing Arrangements," European Journal of Law and Economics, Springer, vol. 16(2), pages 247-263, September.

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    More about this item

    Keywords

    Insurance fraud; Quebec automobile insurance industry; observed fraud; estimated fraud; hidden phenomenon; claim adjusters; count data estimators; robustness;
    All these keywords.

    JEL classification:

    • D81 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Criteria for Decision-Making under Risk and Uncertainty
    • G22 - Financial Economics - - Financial Institutions and Services - - - Insurance; Insurance Companies; Actuarial Studies

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