Moral, Social, and Economic Dimensions of Insurance Claims Fraud

Sharon Tennyson Moral, Social, and Economic Dimensions of Insurance Claims Fraud CONSUMER DISHONESTY STEMS FROM A COMPLEX INTERPLAY OF motivations and circumstances, moderated by morality, opportunity, social norms, and institutional context. The complexity is perhaps nowhere more apparent than in the case of insurance fraud, particu­ larly claims fraud. Claims fraud may arise as a result of deliberate plan­ ning or casual opportunity, and in each case it may involve complete fabrication of losses or relatively small exaggerations. It may be moti­ vated by pure profit seeking, a sense of entitlement, desperation, or resentment. It may even arise inadvertently due to differences of opin­ ion regarding contractual terms or an insured event. Insurance claims fraud is thus variously viewed as an economic-contractual problem, a moral-psychological problem, a moral-sociological problem, or a crimi­ nal problem. Because insurance claims fraud involves taking advantage of the insurer’s contractual promise to pay (some amount of) losses (in some circumstances), it differs from other common situations of consumer dishonesty such as tax evasion, pilfering from an employer, or shop­ lifting.1This unique contractual relationship has important implica­ tions for the character of claims fraud and the ways in which insurers and societies attempt to deal with it. Some have argued that insurance fraud is an example of a “created” crime, because it is determined by the terms of the insurance contract and the strength of their enforce­ social research Vol 75 : No 4 : Winter 2008 1181 m ent (Ericson, Bany, and Doyle, 2000). Fraud is detected only through policing, and increased policing will lead to detection ofmore fraud and therefore to an increased fraud problem. This point of view suggests that the perceived rise in insurance fraud in recent years may result from greater policing rather than from a higher incidence of fraud behaviors, and calls into question the benefits of increased expendi­ tures to detect fraud. However, this ignores the high costs of fraud behaviors to society.2 Once the insurance contract has been defined and agreed upon, its violation through illegitimate claiming will lead to inefficien­ cies and inequities in insurance markets. Inequities occur because costs are inevitably shifted to others when claims are inflated above those accounted for in the premium charge, or when all consumers’ premiums are higher because some consumers inflate their claims. Inefficiencies arise if the possibility of profiting through fraud distorts insurance purchase decisions, loss prevention, or claiming incentives. Additionally, attempts to prevent fraud create contractual restrictions for all consumers that lead to less protection from risks than would occur in a market without fraud. Thus, even in the narrowest economic sense insurance fraud has negative consequences for society. Nevertheless, the policing of fraud inevitably reduces trust rela­ tionships between insurers and consumers and thereby reduces gains from trade in insurance. Reduced trust could increase fraud, since studies show that consumers’ with negative perceptions of insurance institutions express more accepting attitudes toward fraud (Tennyson, 1997). This consideration lends a new dimension to the analysis of the benefits of increased policing of fraud. Transactions costs of policing fraud are also high, taking into account both the resource expendi­ tures of insurance companies and the costs of legal enforcement. For these reasons prevention of insurance claims fraud may be a less costly alternative. However, improving prevention efforts requires a better understanding of the different dimensions of fraud, the determinants of consumer behavior, and the relationship between consumer behav­ ior and institutional rules. 1182 social research THE NATURE OF INSURANCE CLAIMS FRAUD Taxonomies ofinsurance claims fraud often start with the distinction of whether or not an insured event occurred (Weisberg and Derrig, 1991). If no event occurred but a claim is filed then the fraud is planned or outright. Conversely, if a loss occurred but circumstances are falsified or attempts are made to get excessive payments, this is termed opportunis­ tic fraud. Planned fraud may be undertaken by an individual on a one­ time basis, or may be carried out by professionals in a systematic effort to profit from the insurance system. Opportunistic fraud is undertaken by individuals who experience a loss and attempt to shift the costs to the insurance system. Opportunistic fraud is most often...