ABSTRACT
Insurance fraud is one of the most serious problems in the insurance industry. According to Weisberg and Derrig (1991) and D’Arcy (1994), losses from insurance fraud account for a significant proportion of total insurance money in the insurance market. Colquitt and Hoyt (1997) empirically analyzed the losses from insurance fraud in the life-insurance market and their work provides guidelines on developing new laws and regulations to reduce life-insurance fraud. Artis et al. (1999) examined the Spanish automobile insurance market to investigate fraudulent behavior. Dionne and Gagné (2001) empirically analyzed the automobile-insurance market to determine the insurance-fraud prevention effects of deductible contracts. Dionne and Gagné (2002) also empirically analyzed the relationship between the replacement of automobiles and insurance fraud in the Quebec insurance market. Brockett et al. (2002) investigated statistical techniques for analyzing insurance fraud. Crocker and Tennyson (2002) confirmed the effectiveness of settlement strategies when insurer’s auditing is impossible to prevent insurance fraud. Insurers can achieve more efficient risk allocation by transferring their risks (see, for example, Ehrlich and Becker 1972). However, some clients may claim on insurance even if the alleged accident did not occur. Because insurance firms incur costs in investigating claims, they may be deterred from investigating when the costs are high relative to the expected losses from insurance fraud. For example, Picard (1996), Boyer (1999, 2001, 2007), Takao and Okura (2001) and Schiller (2006) developed economic models to analyze the effectiveness of monitoring by insurance firms as well as other strategies designed to prevent insurance fraud. In this situation, a plausible way of preventing insurance fraud is for insurance firms to cooperate and exchange information about the customers of the insurance policy (or policyholders). In practice, insurance fraudsters may have common characteristics. For example, they tend to purchase several insurance contracts and make insurance claims soon after contracting in order to save on insurance premiums. Thus, if insurance firms exchange their information and compile blacklists, they may prevent much insurance fraud.
