Psychological Drivers of Insurance Fraud

Master's Thesis 2017 47 Pages

Business economics - Miscellaneous


Table of contents

List of figures

1 Introduction

2 Main Part
2.1 Justification with the help of Broad Pervasiveness
2.1.1 Broad Pervasiveness of Insurance Fraud
2.1.2 Psychological drivers of Insurance Fraud on the supposition of Broad Pervasiveness
2.1.3 Behavior on the supposition of Broad Pervasiveness
2.2 Justification under assumption of Triviality
2.2.1 Dimensions of Insurance Fraud
2.2.2 Psychological drivers of Insurance Fraud on the supposition of Triviality
2.2.3 Behavior on the supposition of Triviality
2.3 Blaming the insurance as victim
2.3.1 Occurrence of the phenomenon of Blaming the victim
2.3.2 Psychological drivers of Insurance Fraud on the supposition of Blaming the victim
2.3.3 Behavior on the supposition of Blaming the victim
2.4 Negation of the victim
2.4.1 Negation of the victim in the context of Insurance Fraud
2.4.2 Psychological drivers of Insurance Fraud on the supposition of Negation of the victim
2.4.3 Behavior on the supposition of the Negation of the victim
2.5 Comprehension of the Principles of Insurance
2.5.1 Financial and insurance-linked education in the Population
2.5.2 Psychological drivers of Insurance Fraud under a lack of comprehension of the Principles of Insurance
2.5.3 Behavior under the lack of comprehension of the Principles of Insurance

3 Concluding Remarks


List of figures

Fig. Page

1 Estimated annual loss caused by insurance fraud in Germany 23

1 Introduction

The following master thesis covers the psychological drivers of insurance fraud. In this scientific paper it shall be explained how insurance fraudsters try to vindicate their behavior and which forms of reasoning are therefor used.

Insurance fraud itself is defined as a fraud to the detriment of an insurance company by the policy holder or a third party with the aim of obtaining unjustified coverage, demanding a false payment of damages on the merits or to the extent of paying a lower insurance premium. The fraudulent behavior starts with consciously inaccurate information during application and extends up to manipulation in the context of loss (cf. Gabler Wirtschaftslexikon, Versicherungsbetrug 2017). The legal consequences of insurance fraud are the same as of any other fraudulent behavior, like a fine or a short period of imprisonment. Furthermore the insurance company can claim indemnity demands or recourse or the insured can lose his coverage.

It is reckoned that the annual losses of German insurance sector caused by insurance fraud are four billion Euro and that especially in the line of automobile insurance approximately every tenth notification of claim bases on fraudulent background (cf. Gabler Wirtschaftslexikon, Versicherungsbetrug 2017). About 90 percent of insurance brokers report that they already were in contact with fraudulent clients (cf. Knoll 2011) and a common line in the insurance branch states that each tenth notification of claim contains fraud and that ten percent of payments are based on unjustified or fraudulent declarations (cf. Köneke et al. 2015).

In social context insurance fraud is a damage for all insured clients. A higher rate of fraudulent behavior leads to more payments and in conclusion to higher premiums. The increased niveau of premiums furthermore reduces the public welfare of the insured and often leads to smaller profits for the insurance companies. Thereby many small deceptions have a high impact on the insurance companies, because costs of prosecution of these smaller delicts bear no proportion to the outcome (cf. Köneke et al. 2015, Mazar et al. 2008).

Basically insurance fraud is not tolerated in society just as any other form of fraud. But on closer inspection and having a regard to the listed numbers concerning insurance fraud it becomes clear, that there exist different standards. In the Europe-wide European social survey 2010 (Farashah and Estelami 2014) 87 percent of respondents declared that insurance fraud is wrong or absolutely wrong. That means, that for most of the European population it is ineligible to commit insurance fraud, but on the other hand there is a considerable amount of people who have a different standard on this issue.

The question arises why some people commit insurance fraud and what their personal benefits are thereof. One reason is certainly the financial aspect: Insurance fraud is always an action gaining unjustified payments by the company. But these payments are not as valuable as one might expect. Most fraudsters only gain up to 100€ with their false statements and no more than eleven percent of them gain over 500€ (cf. Fetchenhauer 1998). This implies that there are some more reasons to commit fraud. Policy holders with fraudulent behavior sometime see their gains obtained under false pretenses as a reward for their long lasting premium payment. 20 to 30 percent of clients consider that insurance is only profitable when during elapse time at least one claim has happened (cf. Knoll 2011 and Fetchenhauer 1998) and if this claim did not occur on its own, some insured do not shrink back of simulating. The described way of behavior clarifies a specific idea of justice where every insured has to get money back from the insurance company, whereas this undoubtedly is not the business model of an insurance. Nonetheless it can be a motive for insurance fraud. Some fraudsters see themselves as more intelligent consumers who understand how to get the most out of their contracts. The ones who know how to deceive the insurer seem obviously to be well versed and appeal smarter and more diligent than the average consumer (cf. Köneke et al. 2015). A further aspect for committing insurance fraud is the relatively easy realization of the act itself. A few incorrect statements can suffice to get a corresponding financial reward and the seduction to commit fraud is higher when it seems achievable for everyone. The decision to be honest solely depends on the expected external benefits for oneself, like a higher disbursement by the insurance company and the corresponding external costs, for example a fine (cf. Mazar and Ariely 2006). Knowing that only few insurance frauds are revealed - not even every fourth person informs the police or the insurance company when witnessing fraud (cf. Lesch und Byars 2013) - it is logical that fraudster find it easy to deceive the company.

The circle of people who decide upon committing fraud for the stated reasons typically has following parameters1: In an Europe-wide study twice as much men as women committed that they had submitted at least once a wrong or exaggerated notification of claim (cf. Josephson Institute of Ethics 2009). The male fraudster can be rationalized with the fact that in most households the man is responsible for financial matters. Therefore less women than men interact with insurance companies. Including this fact the fraudulent notifications of claim by women statistically are the same as the ones made by men (cf. Köneke et al. 2015). Policyholders are more likely to have a disposition to commit fraud the more policies they hold. An insured person, who is unsatisfied with his income, whether it is high or low, also has a strong probability of committing fraud (cf. Köneke et al. 2015). The younger a client is, the more he2 is likely to commit fraud - 65 percent of people under 30 years show a propensity for fraud, but only 22 percent of people over 60 do so (cf. Fetchenhauer 1998).

Some other factors have no impact on the probability of committing insurance fraud. These are the height of the income, level of education and rural residence opposed to urban residence (cf. Köneke et al. 2015).

The insurance fraud itself can occur in four different forms: Redefining, exaggerating, pretending and inducing (cf. Boyer 1998). The first two are the most common types concerning smaller forms of fraudulent behavior, also designated as soft fraud. The other two manifestations primarily take part in professional insurance fraud, called hard fraud, which is not covered by this essay. To give a brief summary of how these two discussed forms of insurance fraud look like, an example for each of them is being described.

The form of redefining may occur in the following way: A loss is reported to the insurance company by the fraudster`s neighbor as a third party liability loss. He states that he accidentally sat down on the fraudster’s glasses and thereby broke them. In reality the fraudster carried his glasses in his backpack while skiing and fell onto them. If he had reported the loss with the actual course of action, the insurance company of his neighbors third party liability contract would not have to pay the loss, he had to pay the loss by himself.

An example for exaggerating a loss is for example to declare that the camera stolen This description is no generalization of the single perpetrator but rather the result of statistical investigation. Note with regard to the use of the masculine form: the masculine form used in this essay incorporates the feminine form.

during the last holiday had a value of 500€ whereas the real purchase price was only 400€. The value of the stolen camera, which was in fact a loss for the insured, is being paid by the insurance company, but not with its actual value of 400€ but with the increased wrong value of 500€.

In general it is viable to say that insurance fraud principally is a deed with negative connotations and such deeds need to be justified and reclassified to reduce cognitive dissonances (cf. Festinger 1957). In the following chapters five different reasons of justification for insurance fraud shall be examined and then classified with the aid of different psychological drivers. The discussed justifications of this thesis are Broad Pervasiveness, Triviality, Blaming the Victim, Negation of the Victim and Comprehension of the Principles of Insurance. These justifications shall not be a concluding enumeration of justifications in order to justify insurance fraud for oneself, but they constitute the current state of research concerning psychological and insurance fraud research.

2 Main Part

2.1 Justification with the help of Broad Pervasiveness

2.1.1 Broad Pervasiveness of Insurance Fraud

According to a study by Knoll in 2011 at least every third person knows someone who already committed fraud. The reason behind this prevalent knowledge is due to the fraudsters retelling. Every second deceiver tells about his act to another person, every fifth one even talks to multiple people and brags about his performance (cf. Fetchenhauer 1998). Even if the ordinary insurance fraud is an act committed by one person, in some cases the help of others is necessary. As described in the example for redefining, the third person, the policyholder of the third party liability police, needs to be informed and has to agree with the insurance fraud. Sometimes even the insurance brokers get involved with the fraud (cf. Köneke et al. 2015): Several insured who committed insurance fraud stated that their insurance broker condoned their wrong statements and 14 percent of them actively helped their clients with these wrong statements (cf. Fetchenhauer 1998). Over the last years the number of insurance policies per policy holder increased steadily (cf. Pletter 2008) and a policyholder more likely has a disposition of committing fraud the more policies he holds. The constantly expansion of insurance portfolios leads to the assumption that in the long run more and more insured will commit insurance fraud, just because they have a wider choice of deceivable insurance policies (cf. Köneke et al. 2015 and Wittkämper et al. 1990). Also the attitude towards insurance fraud seems to change for the worse. According to a study in Dresden, every tenth person already committed fraud but a third of people can think of future insurance fraud by themselves (cf. Mehlkop 2011). Considering these numbers it is clearly recognizable that insurance fraud is a well-known phenomenon in society. The following chapters shall address how fraudsters use this fact as a personal justification for their behavior.

2.1.2 Psychological drivers of Insurance Fraud on the supposition of Broad Pervasiveness

Generally the average person appears to be convinced that he or she is better than the average (cf. Alicke and Sedikides 2009). People see themselves as more morally, more honest and less selfish than the general public and these values mean a lot to them (cf. Josephson Institute of Ethics 2009, 2011). Also in their role of customer generally speaking (cf. Vitell et al. 2001) and as insurance policyholder in particular, people see themselves as more morally than the others. Even if they admitted insurance fraud, which is a distinctly unethical act, they still describe themselves as an ethical person (cf. Brinkmann and Lenz 2006). In this context moral in the point of view of the individual is often what serves the personal welfare or this seems to be a justification for a good feeling with the unethical act of insurance fraud. At least it reduces the badness of the deed (cf. Köneke et al. 2015).

People often perceive their close environment in a just as overly positive light as they perceive themselves (cf. Kenny and Kashy 1994). If someone in this close environment is committing insurance fraud, there is being put a better complexion on the act of fraud as if the insurance fraud would have been considered in isolation (cf. Sinclair et al. 2005). The behavior of fellow beings signalizes what is wrong and what is right and thereby shapes the own way of looking at things (cf. Sherif 1936 and Lesch and Baker 2013). This form of groupthink can influence the attitude of one single person so much, that he is convincing himself that the ethical standard of being honest in dealing with insurance does not apply to himself in this particular context (cf. Sinclair et al. 2005). People often display their behavior depending on the situation they are in - even if they are not always aware of this circumstance (cf. Van Boven et al. 1999) - and in this context it is viable to say that a fraudulent environment facilitates fraudulent actions for oneself. Furthermore the very same insurance fraud is perceived as different and nonidentical on the assumption of broad pervasiveness in the close environment and then is scored in another, usually better way (cf. Kahnemann and Tversky 2000). In consequence, the fraud appears to be less harmful and offensive as it is when it appears to be pervasive.

Generally speaking this reasoning is self-deception, because insurance fraud is not getting less illegal or more permitted only when everyone agitates this way. The juridical standard and even the social perspective stay the same. But in the fraudsters view it is only important how to vindicate his behavior himself. He is aware of his act and also confesses to the responsibility for the act but denies the gravity of it. This form of justification is necessary to neutralize the sense of guilt, which usually accompany a wrong deed. In psychology this phenomenon is called neutralization of cognitive dissonances, which occurs when the own behavior differs from the personal attitude (cf. Shu et al. 2009). In the context of insurance fraud it concerns the fact that every policyholder assesses himself as a highly moral and honest person but commits fraud at the same time. To preserve the positive self-assessment, a motivated reasoning is required and the fraudster uses many different arguments convincing himself that insurance fraud in his case is no bad act. Considering the broad pervasiveness of insurance fraud these vindications may be: “Insurance fraud isn`t bad because everyone else is betraying too and what everybody is doing can`t be wrong” or “It`s normal to commit insurance fraud, that`s no big deal”. These criterions address the fact that we see our environment in a positive light and willingly adapt to the group`s opinion (cf. Sherif 1936 and Lewin 1947 and 1952) inasmuch that we are able to forget our own previous attitude concerning fraud. The argument of “everyone is doing so” could also be an attempt of splitting the responsibility for the deed, which reduces the own amount of guilt (cf. Köneke et al. 2015). People behaving immorally and unethical are classifying themselves at the same time as honest and morally which is reasonable with suchlike justifications (cf. Trivers 2013). Therefore in the first step it is necessary to become aware of the fact, that the planned behavior is possibly unethical only to use justifications in the next step to finally be unaware of the immorality of our actions (cf. Köneke et al. 2015).

2.1.3 Behavior on the supposition of Broad Pervasiveness

This chapter shall depict which effects the pictured moral and psychological gradings have on the actual customer behavior concerning insurance fraud.

Taking up the position that insurance fraud is not an offensive act because of its broad pervasiveness the fraudster is only perceptive for pleasant information about insurance fraud supporting his stance. “People favor welcome over unwelcome information in a manner that reflects their goals or motivations...” (Van Hippel and Trivers 2011, Page 1, cf. also Kunda 1990) and therefor fraudsters often conduct biased information search, like a conversation with the neighbor or colleague, who as well committed insurance fraud, but then “...avoid further information search because they may encounter information that is incompatible with their goals or desires.” (Van Hippel and Trivers 2011, Page 8). That means that the fraudster stops his research about pervasiveness and the behavior concerning insurance fraud in his environment at this point before he might get information that is contrary to his current beliefs. He constrains his own amount of searching. Van Hippel and Trivers (2011, Page 8) sum this up with the thought that “...people sometimes do not tell themselves the whole truth if a partial truth appears likely to be preferable.”.

The biased information search not only concerns the amount of information searched, but also the selective media and environment the fraudster is using. Frey found out in 1986 that people choose different political information sources according to their political background and this principle can be assigned in the same way for insurance fraud. A fraudster is only talking to the people surrounding him, who also committed insurance fraud, he won`t talk to honest insurance clients, and also much more favors TV shows or other media input which address the topic. This behavior takes place because people “...avoid telling themselves the whole truth by searching out those bits of truth that they want to hear...” (Van Hippel and Trivers 2011, Page 9) just to make sure the obtained information is consistent with their ideology (cf. Van Hippel and Trivers 2011). “Additionally, social sharing of information can lead to selective forgetting of information that is not discussed and social confirmation of inaccurate information can exacerbate the false memory effect.” (Van Hippel and Trivers 2011, Page 6; cf. Coman et. al. 2009, Cuc et. al. 2007, Zaragoza et. al. 2001). This social conformity increases with every added group member up to the number of five but then rather stagnates (cf. Asch 1955), which is also a clear indicant, why some insurance fraudster brag about their deed and talk to several people in their environment. The constant dealing of media with insurance fraud via news or TV shows (e.g. “Claimed and Shamed” on BBC) contributes to the broad awareness of pervasiveness, because it reaches more people than by confidential conversation. This kind of attention furthermore reinforces the effect of slight misgiving concerning insurance fraud and encourages even more fraudulent actions because of the even more visible and prominent role models and their bandwagon effect.

The impression of being surrounded by many insurance fraudsters leads to a certain trepidation of disadvantage in comparison with other fraudulent clients. If everyone is betraying, the insurance benefit diminishes and if an individual would like to have his share of the cake, he has to defraud too (cf. Pratt and McLaughlin 1998, Köneke et al. 2015). Secondly the behavior of others shows the fraudster that no shrinking back from condemnation, the so called social exclusion, is necessary (cf. Ajzen 1991). In this case people do not fear social punishment because the social norms and values in the group of fraudsters went into reverse.

When a fraudster notices that insurance fraud is not often revealed, he is going to diminish his personal risk of any punishment further, “..which in turn will lead to an even greater tendency for violation.” (Mazar and Ariely 2006, Page 13). This psychological association gives rise to unrealistic optimism as reversal effect concerning the fear of punishment. Analogous to the bystander effect examined by Latané and Darley in 1970, which says that the more people witness an accident the likelihood of a victim being helped is lower. The proportion of insurance frauds being revealed decreases with every confidant who behaves in the same way. Not even every fourth informs the police or the insurance company witnessing fraud (cf. Lesch und Byars 2013).

In conclusion it can be said, that the more widespread and established insurance fraud is among a group, the more likely it is that large parts of this group put themselves up to commit insurance fraud.

2.2 Justification under assumption of Triviality

2.2.1 Dimensions of Insurance Fraud

According to a study by Fetchenhauer in 1998, 54 percent of insurance fraud acts have an equivalent of no more than 100€, 7 percent range between 500€ and 1.000€ and only 4 percent amount to more than 1.000€. Even taking inflation into account, it still means that the average fraudulent act ranges in a low level of financial loss. The supposed triviality of insurance fraud is not only visible in the financial values but also in the defrauded lines. Considering the different frequencies of single policies there is a constant distribution of fraud in the lines of third-party liability insurance, home contents insurance and luggage insurance (cf. Köneke et al. 2015). At the lines of accident insurance, health insurance, life insurance or even automobile insurance the percentage amount of fraud is much lower, this is also where the disparity to professional insurance fraud can be identified (cf. Köneke et al. 2015). Whereas the first listed insurances are off-the-shelf products and easy in handling, the other ones are very complex and tricky especially concerning fraud. The ordinary insurance fraud must be easy to implement and low in value to be justified by oneself in terms of the average policyholder, who does not see himself as a professional fraudster. Because of this the third-party liability, home contents and luggage insurance are suitable for the commonplace insurance fraud because the defrauded sums are guided by the insured objects. The value of luggage is rarely over 500€, in home contents insurance electrical equipment, which has a value up to 1.000€ on average, is the most used content for fraudulent acts. Concerning thirdparty-liability also the low-value everyday items like broken glasses or mobile screens, which are foisted on another person and their insurance police are common. Beside the low amount of defrauded sum in the described lines of insurance the handling of these ones is relatively simple too. Unlike fraud with accident insurance where possibly a whole accident needs to be pretended, upon the three listed lines it is easy to redefine or exaggerate an already occurred insurance case. So the triviality of an insurance fraud depends on the finagled sum and on the simplicity and effort of the implementation in the eyes of the fraudster.

2.2.2 Psychological drivers of insurance fraud on the supposition of Triviality

Some clients never think of insurance fraud as a criminal offense, no matter how high the damage is - their rate is about 15 percent (cf. TNS Emnid 2002). But in general although insurance fraudster tend to diminish their finagled sums, studies and evaluations by insurance companies point at the fact that fraudsters do not want to take the big catch (cf. Wagner 2014). A German survey found that one out of ten thinks fraud is seen as a criminal offence depending on the finagled sum (cf. TNS Emnid 2003). In addition the moral acceptance of insurance fraud is higher the lower the finagled sum is and the less divergent from reality the statement leading to the insurance fraud is (cf. Fetchenhauer 1998). This is based on the fact that moral in most people´s perception is not a fixed point, but rather a continuum (cf. Köneke et al. 2015), which leads people to have a leeway when ranking an action as morally or immorally (cf. Mazar et al. 2008, Nisan 1991). Only after the fraudulent actions reach a certain extent and the critical inhibition threshold is being trespassed the inner control system which monitors honesty signalizes immorality (cf. Köneke et al. 2015). Where this critical inhibition threshold lies is differing amongst people. Some clients think that already a statement varying only one hour from the real insurance case is immorally whereas other would even state a modification of several days. If people want to maintain their positive self-concept they usually are not able to defraud up to an unlimited amount. The defrauding and the self-deception only level up to a certain individual point (cf. Mazar et al. 2008). Regarding this personal level it is important to consider the actual claim and the insured sum. Because the relative height of the finagled amount compared to the actual sum is determining whether the fraudster is able to vindicate the fraud by himself (cf. Köneke et al. 2015). Consequently even high-value fraud can appear justifiable if only the insured sum or the aspiration of the policyholder is corresponding. De facto high finagled sums which can also be vindicated on the part of the fraudster occur extreme rarely, because the most defrauded lines of insurance as described earlier contain only small amounts insured (cf. Köneke et. al. 2015). Considering it from the psychological viewpoint Kunda in 1990 found that people favor welcome over unwelcome information reflecting their motivations and “when people avoid unpleasant truths in



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Versicherung Insurance sociology verhaltensforschung behavioral research versicherungsbetrug insurance fraud fraud psychological drivers of behavior finance management



Title: Psychological Drivers of Insurance Fraud