Contract design and insurance fraud: an experimental investigation

This paper investigates the impact of insurance contract design on the behavior of filing fraudulent claims in an experimental setup. We test whether or not peoples' fraud behavior varies for insurance contracts with full coverage, a straight deductible or variable premiums (bonus-malus contract). In our experiment filing fraudulent claims is a dominant strategy for selfish participants without any psychological costs of commit fraud. While some people never commit fraud, there is a substantial share of people who only occasionally or never defraud. In addition, we find that deductible contracts may be perceived as unfair and thus increase the extent of fraudulent claims compared to full coverage contracts. In contrast, bonus-malus contracts with variable insurance premiums significantly reduce insurance fraud both compared to full coverage and deductible contracts. This reduction cannot solely be explained by monetary incentives. Our results indicate that bonus-malus contracts are therefore a good means to reduce insurance fraud.