The Economics of Insurance Fraud Investigation: Evidence of a Nash Equilibrium

Richard Derrig~Stephen P. d'Arcy~Herbert I. Weisberg, United-States

The behavior of insurance companies investigating insurance fraud follows one of several Nash Equilibria under which companies consider the cost savings on a portion, or all, of the total claim. This behavior can reduce the effectiveness of investigations and cost reductions if the suboptimal equilibrium prevails and can lead to higher insurance premiums. Alternative cooperative arrangements are examined that could reduce or eliminate this potential inefficiency. Empirically, Massachusetts no-fault auto data for independent medical examinations shows that (1) investigation produces a net savings of about eight percent and (2) the investigation frequency is likely in excess of the theoretical optimal.
Date: 29 May - Time: 16:30 to 18:00 - Room: 253
Theme: 9.A. Various topics