This research summary was first published in the IIB Bulletin, 2014, Vol. 1, Iss. 1, pp-8-9; Co-author: Vishnu Vardhan Pallreddy
Professor Sharon Tennyson of the Department of Policy Analysis and Management at the Cornell University, is an active researcher in the area of Insurance Laws and Economics, is a widely acclaimed authority on matters pertaining to Insurance, on the editorial board of several Insurance related journals and has received various best paper awards for her work in the field of Insurance.
In her research paper titled “Moral, Social, and Economic Dimensions of Insurance Claims Fraud”, published in 2008, by the Social Research Quarterly, she writes that “Customer dishonesty stems from a complex interplay of motivations and circumstances, moderated by morality, opportunity, social norms, and institutional context”.
Her research deserves mention, as the Indian insurance industry is reeling due to the pressures of various types of fraudulent claims.
Tennyson succinctly reminds us that the Insurance frauds are different from other types of frauds [shoplifting or tax avoidance] as actions of a few [fraudulent claims] result in increased premiums for everyone going forward. Also, attempts to prevent fraud by the insurance companies, lead to less protection from risks than would occur in a market without fraud. It also adds to the costs of the insurers. However, policing could lead to more fraud because it erodes the trust factor and results in more costs. Most analysts believe that the costs and prevalence of opportunistic soft fraud – particularly buildup – is much higher than those of more systematic, planned or criminal claims fraud
Therefore, prevention of fraud may be a less costly alternative. However, it requires a better understanding of the different dimensions of fraud, the determinants of consumer behaviour, and the relationship between consumer behaviour and institutional rules.
Tennyson writes that much of the Insurance claims go undetected and it is difficult to estimate the number of fraudulent activities or the amount of excessive claims.
Moral hazard is an important psychological aspect of Insurance. Having Insurance reduces the insured’s incentives to prevent losses, and exaggerated or fictitious claims. Also, customers who feel that insurance companies treat customers unfairly / make too much money / charge unfair premiums, are more accepting of fraud. Evidence also suggests that consumers will be more willing to commit fraud if they perceive that the harm to others would be small.
Probability of detection, risk aversion, sensitivity to reputation penalties, social stigma, psychic costs of engaging in fraud, social norms in the form of peer group or network influences etc. are some of the deterrents to committing fraud.
Efforts to reduce prevalence and acceptability of fraud improve image of insurance industry and enhance trust between insurers and customers. General insurance education improves the knowledge of insurance as well as results in more positive attitudes toward insurance institutions. Also, fraud public awareness campaigns may also be effective.
Evidence suggests that:
a. Extent of fraudulent claiming is very positively related to the percentage of consumers who find claims fraud to be acceptable
b. Attitudes vary from urban to rural, women to men, elderly to young. Women, highly educated and the elderly are likely to be less accepting of fraud
c. Consumers with more insurance experience (more policies and more claims) are less accepting of insurance fraud
d. Moral-psychological factors in the form of ethical thinking etc impact the fraud acceptance among the survey respondents
Trend over the years
a. Increased attention, more empirical studies, antifraud watchdog and advocacy groups, awareness campaigns, stronger laws
b. Much of the focus has been directed toward detecting and criminalizing fraud
c. Fraud awareness campaigns often emphasize the criminal nature of fraud and the likelihood of being caught and penalized
d. Success in fighting fraud is often measured by number of cases brought or convictions obtained
e. Increasing willingness on the part of insurers to litigate fraud and refer cases to law enforcement agencies
Opportunistic soft fraud
a. Widely believed to be much more prevalent than criminal fraud
b. Improving fraud detection and advertising this fact may provide an effective deterrent
c. Many consumers do not view some forms of claims exaggeration as fraudulent
d. A criminal focus applied to these cases may reinforce negative perceptions of insurance institutions and their fairness to customers
When internal monitors are primed, most customers state that insurance fraud (even minor claims exaggeration) is unacceptable. Consumers with more insurance experience and those with recent claims experience are less likely to believe that claims exaggeration is acceptable. Greater focus on social and psychological dimensions of insurance claims fraud may increase the success of soft fraud prevention without impairing insurance relationships.
Tennyson, Sharon., “Moral, Social, and Economic Dimensions of Insurance Claims Fraud”, Social Research, Vol. 75, No. 4, Fraud (WINTER 2008), pp. 1181-1204