Insurance Fraud and Optimal Claims Settlement Strategies

Keith J Crocker and Sharon Tennyson

Journal of Law and Economics, 2002, vol. 45, issue 2, 469-507

Abstract: We examine the optimal claims settlement strategy for a liability insurer when claimants can permanently misrepresent their losses by engaging in costly claims falsification. In this environment, claims auditing is not a possible deterrent to fraud, and the settlement strategy consists of an indemnification profile that relates the insurance payment to the claimed amount of loss. The optimal indemnification profile is shown to involve systematic underpayment of claims at the margin as a means to deter loss exaggeration, with the extent of underpayment limited by expected litigation costs and potential bad-faith claims. The key testable implication of the theory is that the extent of underpayment should be greater for classes of claims for which loss exaggeration is easier. Empirical analysis of insurance settlements for bodily injury liability in automobile accidents confirms this prediction. This suggests that liability insurers optimally choose claims payment strategies to lessen a claimant's incentive to exaggerate losses. Copyright 2002 by the University of Chicago.

Date: 2002
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (45)

Downloads: (external link)
http://dx.doi.org/10.1086/340394 (application/pdf)
Access to the online full text or PDF requires a subscription.

Related works:
This item may be available elsewhere in EconPapers: Search for items with the same title.

Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text

Persistent link: https://EconPapers.repec.org/RePEc:ucp:jlawec:v:45:y:2002:i:2:p:469-507

Access Statistics for this article

More articles in Journal of Law and Economics from University of Chicago Press
Bibliographic data for series maintained by Journals Division ().