Journal of Banking & Finance Vol. 32 No. 1 2008
Providers’ affiliation, insurance and collusion
Abstract
This paper provides a theoretical analysis of the benefits for an insurance company to develop its own network of service providers when insurance fraud is characterized by collusion between policyholders and providers. In a static framework without collusion, exclusive affiliation of providers allows insurance companies to recover some market power and to lessen competition on the insurance market. This entails a decrease in the insured’s welfare. However, exclusive affiliation of providers may entail a positive effect on customers’ surplus when insurers and providers are engaged in a repeated relationship. In particular, while insurers must cooperate to retaliate against a fraudulent provider under non-exclusive affiliation, no cooperation is needed under exclusive affiliation. In that case, an insurer is indeed able to reduce the profit of a malevolent provider by moving to collusion-proof contracts when collusion is detected, and this threat may act as a deterrent for fraudulent activities. This possibility may supplement an inefficient judicial system: it is thus a second-best optimal anti-fraud policy.
- DOI
- 10.1016/j.jbankfin.2007.09.012
- Volume
- 32
- Issue
- 1
- Pages
- 170-186
- Language
- en
- Sources
- crossref openalex bibtex:phds-export.bib