The Impact of Insurance Fraud Detection Systems

This article analyzes the impact of detection systems in an insurance fraud context. In a noncommitment Costly State Verification setting insurers can only detect fraudulent claims by performing costly audits, and policyholders are overcompensated by the optimal insurance contract. We show that auditing becomes more effective and overcompensation can be reduced, when insurers are able to condition their audits on the information provided by detection systems.