Journal article
Insurance Fraud in a Rothschild-Stiglitz World
The Journal of risk and insurance, Vol.87(1), pp.117-142
03/01/2020
DOI: 10.1111/jori.12264
Abstract
In this article, we model a competitive insurance market where policyholders privately have information about their probability of accident ex ante and know the state of the world ex post. We combine costly state verification without commitment and arguments from insurance contracting under adverse selection to characterize the resulting allocations. Insurance fraud convexifies the insurer's zero expected profit condition, which can lead to complete unraveling with low risks dropping out of the market. The standard case, however, involves rationing of low risks, which raises their probability of fraud and their success rate when committing it. As a result, adverse selection increases fraud in the economy. We also show that cross-subsidization from low risks to high risks mitigates the fraud externality. Our results highlight that adverse selection and insurance fraud interact in nontrivial ways and have the potential to aggravate each other.
Details
- Title: Subtitle
- Insurance Fraud in a Rothschild-Stiglitz World
- Creators
- M. Martin Boyer - Université de MontréalRichard Peter - University of Iowa
- Resource Type
- Journal article
- Publication Details
- The Journal of risk and insurance, Vol.87(1), pp.117-142
- Publisher
- Wiley
- DOI
- 10.1111/jori.12264
- ISSN
- 0022-4367
- eISSN
- 1539-6975
- Number of pages
- 26
- Grant note
- 435-2016-1109 / Social Sciences and Humanities Research Council of Canada; Social Sciences and Humanities Research Council of Canada (SSHRC) Retirement and Savings Institute at HEC Montreal
- Language
- English
- Date published
- 03/01/2020
- Academic Unit
- Finance
- Record Identifier
- 9984380517802771
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