Preventing Soft Fraud - Insights From Behavioural Science
Lying and cheating are neither motivated by a criminal disposition nor do they follow the cost-benefit principles of the Simple Model of Rational Crime, according to Behavioural Economics and Psychology Professor Dan Ariely.
People cheat just a little when the opportunity arises and only gain a slight advantage, Ariely writes in his book, The (Honest) Truth About Dishonesty: How We Lie to Everyone – Especially Ourselves. What stops us from milking the opportunity? We cheat to the extent that our self-image as an “honest individual” allows, Ariely concludes. Our self-image must not suffer as a result of our lies or fraudulent activities.
For example, when a policyholder overstates a loss to get a higher compensation (exaggeration) or tells a lie about it to get reimbursed (redefinition), he can justify his actions because it doesn’t tarnish his self-image as an “honest person.”
Behavioural science shows that a person is more likely to complete a claims form truthfully if he or she signs it before providing the required information. That means that merely the placement of the signature and statement on honesty at the beginning of the form could contribute to preventing fraud. Checks and penalties are less effective because they kick in after the fraud has taken place, according to Köneke et al.1 They can even breed customer mistrust and result in retaliation - in the form of policy cancellations or fraud.
Köneke et al. identified several different arguments used by policyholders to justify soft fraud and keep their self-image untarnished. Here are a few:
- Deny there is any damage: The claimant fails to recognise the financial impact that his or her small value fraud causes to the insurance company. He or she just sees the company as the wealthy collector of premiums - not as a provider of benefits.
- Deny there is a victim: The claimant justifies his or her fraudulent actions as being victimless. The anonymous and financially robust insurance company does not fit his or her image of a victim.
- Compare to more serious offences: The claimant plays down the damage he or she has caused so that, in comparison to more significant fraud, his or her action has caused no real damage to anyone.
Insurance companies need to come up with strategies to prevent soft fraud: perhaps by intensifying customer support, speeding claims processing, making policy wording more transparent, and educating customers about insurance terms and claim decisions. If people are made to feel they belong to a community of policyholders, they may recognize any fraudulent activity is at the expense of other members and this may stop them from exaggerating or redefining claims.
Adopting these strategies could help companies alter how people view the industry and approach filing claims. Insurers could also offer more incentives to discourage fraudulent claims. For example, customers could be grouped into “micro collective” networks that offer members a bonus when no one in the group makes a claim over a specific period. Ariely summarises this type of approach neatly as appealing to the honesty of the (mostly) honest individual.
For more, read my article, Soft Fraud and Possibilities for Prevention, in Risk Management Review.
- Köneke, Vanessa; Müller-Peters, Horst; Fetchenhauer, Detlef (2015) Versicherungsbetrug verstehen und verhindern, Springer Gabler, Wiesbaden [Understand and prevent insurance fraud, only in German].