Insurance Fraud


  • Richard A. Derrig

  • 1

    Railway spine was a controversial disease first described in the 1860s by a British doctor as one with symptoms with a source in “microscopic changes to the spine that could not be seen.” Naturally, railway spine became a leading cause for personal injury compensation in rail accidents in Britain and the United States (Dornstein, 1996, pp. 209-219).

  • 2

    See Dionne et al. (1993) for workers’ compensation andCummins and Tennyson (1996) for automobile insurance. For an up-to-date general discussion of moral hazard in the insurance context, see Doherty (2001), Chapter 3.

  • 3

    This trip though fraud publication history is necessarily short and incomplete. Apologies to those making important contributions that are omitted here.

  • 4

    An annotated searchable bibliography on insurance fraud is available on the Insurance Fraud Bureau of Massachusetts Web site at

  • 5

    It is highly likely that proprietary models were developed during this time frame but were not published.

  • 6

    In its annual report for 2000, the CAIF (2001a) produced a section called “Pin the Tail on the Estimate.” Estimates for the cost of insurance fraud ranged from a low of $18 billion by the National Insurance Crime Bureau for property-liability fraud to a high of $96 billion by Conning & Co. for all lines of private-market insurance.

  • 7

    Table 1 originally appeared in Derrig and Krauss, 1994, p. 399.

  • 8

    Of course, surveys such as the International Research Council/Insurance Services Office [IRC/ISO] 2001 survey provide an accurate picture of the perceptions of fraud, if not fraud itself.

  • 9

    In one such sampling, four different coders provided subjective appraisals on the fraud content of Massachusetts personal injury protection (PIP) and bodily injury (BI) liability claims. While each set of coders identified 5–10 percent of the claims as suspected fraud, no claim was judged as suspected fraud by all four coders 1995(Derrig and Ostaszewski, 1995).

  • 10

    While the vast majority of referrals concerned property-liability lines, occasional referrals were for other lines such as life and viaticals.

  • 11

    For example, in my opinion, prosecutors are most important (Rank 1) for deterring fraud but least important (Rank 10) for mitigating abuse. My full ranking for the Ten Defenses (in the alphabetical order of Table 3) for fraud are 5, 7, 3, 6, 8, 9, 10, 4, 1, and 2, and for abuse they are 5, 4, 9, 3, 7, 8, 1, 2, 10, and 6.

  • 12

    DM algorithms can also serve the more specialized sorting required within the set of claims handled by SIU personnel. Indeed, the more sophisticated algorithms may be reserved for SIU use, perhaps because of sensitive information and privacy concerns.

  • 13

    Actual claim processing systems may contain more complicated layers such as medical bill reductions of upside outliers to so-called reasonable and customary levels.

  • 14

    One potential example would be the use of credit scores as a separate criterion not derived from the company claim data. Another example would be some scoring of providers by their propensity for involvement in questionable or exaggerated claims.

  • 15

    EFD is the acronym coined by Major and Riedinger for electronic fraud detection.

  • 16

    See Biddle, 2001.

Richard A. Derrig is vice president of research for the Insurance Fraud Bureau of Massachusetts and senior vice president for the Automobile Insurers Bureau of Massachusetts, Boston, Massachusetts. The author acknowledges the production assistance of Eilish Browne and Julie Farrell of the Automobile Insurers Bureau and the hospitality during spring semester 2002 of the Risk Management and Insurance Department of the Wharton School, University of Pennsylvania.


Insurance fraud is a major problem in the United States at the beginning of the 21st century. It has no doubt existed wherever insurance policies are written, taking different forms to suit the economic time and coverage available. From the advent of “railway spine” in the 19th century to “trip and falls” and “whiplash” in the 20th century, individuals and groups have always been willing and able to file bogus claims. The term fraud carries the connotation that the activity is illegal with prosecution and sanctions as the threatened outcomes. The reality of current discourse is a much more expanded notion of fraud that covers many unnecessary, unwanted, and opportunistic manipulations of the system that fall short of criminal behavior. Those may be better suited to civil adjudicators or legislative reformers. This survey describes the range of these moral hazards arising from asymmetric information, especially in claiming behavior, and the steps taken to model the process and enhance detection and deterrence of fraud in its widest sense. The fundamental problem for insurers coping with both fraud and systemic abuse is to devise a mechanism that efficiently sorts claims into categories that require the acquisition of additional information at a cost. The five articles published in this issue of the Journal of Risk and Insurance advance our knowledge on several fronts. Measurement, detection, and deterrence of fraud are advanced through statistical models, intelligent technologies are applied to informative databases to provide for efficient claim sorts, and strategic analysis is applied to property-liability and health insurance situations.