Journal of Risk and Uncertainty

, Volume 47, Issue 1, pp 67–92

Does insurance fraud in automobile theft insurance fluctuate with the business cycle?

Article

Abstract

Financial institutions face various cyclical risks, but very few studies have analyzed the cyclicality of operational risk. External fraud is an important operational risk faced by insurers. In this research, we analyze the empirical relationship between insurance fraud and the business cycle and we concentrate our study on two insurance contracts that may create an incentive to defraud. We find that residual insurance fraud exists both in the contract with replacement cost endorsement and the contract with no-deductible endorsement in the Taiwan automobile theft insurance market. These results are consistent with previous literature on the relationship between fraud activity and non-optimal insurance contracting. We also show that the severity of insurance fraud is countercyclical. Fraud is stimulated during periods of recession and mitigated during periods of expansion. Although this last result seems intuitive, our contribution is the first to measure its significance.

Keywords

Operational risk Insurance fraud Replacement cost endorsement No-deductible endorsement Automobile theft insurance Business cycle 

JEL Classifications

G22 G20 D80 D81 

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Copyright information

© Springer Science+Business Media New York 2013

Authors and Affiliations

  1. 1.Canada Research Chair in Risk Management, HEC MontrealMontrealCanada
  2. 2.Department of InsuranceTamkang UniversityTamsuiTaiwan

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