Weirdly, the better we get at catching insurance fraud, the more people try to pull off fake claims.
March 20, 2026
Original Paper
Falsification Fraud in Insurance Markets: Algorithms, Auditing, and Nitpicking
SSRN · 6316239
The Takeaway
While you would expect better technology to deter fraud, 'middle-of-the-road' algorithms change how insurers choose to audit. This shift can paradoxically make falsifying a claim more profitable for the policyholder, meaning only extremely high-sensitivity technology actually improves welfare.
From the abstract
This paper studies a prevailing yet underexplored problem of falsification fraud: a policyholder suffers a real loss in a contractually excluded state but reports it as covered. In a perfectly competitive market with a costly and uncommitted auditing strategy, equilibrium features positive auditing and falsification, and the equilibrium contract can exhibit underinsurance when auditing is inexpensive or the policyholder's risk aversion is high, and overinsurance otherwise. We then introduce two