Info Assymetry
10th Global Conference of Actuaries
Lemons Problem and Health Insurance Fraud
Role of information asymmetry in inducing health insurance fraud.
By T S Rama Krishna Rao
Samuel B Sekar
Abstract
In insurance contracts inaccurate or false information results in distortion of truth. Imperfect information on the other hand results in adverse selection (lemons) and moral hazard. Imperfect information when performed intentionally, with unwarranted profit in mind, where one of the parties will be a victim to the cheating of the other, is a fraud. Insurance business is not immune to frauds though the “Principle of Utmost Good Faith” is one of the pillars, which assures the success of insurance operations. When this principle is breached, it disturbs an insurer’s capability in meeting its social and business obligations. This is what happens, when either the person buying an insurance plan or the one who provides insurance commits fraud, by giving or withholding information which misleads the decision making process. The information imbalance is called lemons problem, a form of “Asymmetry of information”. This paper focuses on health insurance frauds resulting from asymmetry of information – the lemons problem.
Important terms
Health Insurance Fraud, Asymmetric Information, Principle of Utmost Good Faith, Representations,
Warranties, Concealments, Mistakes, Non-disclosure, Demand Side Frauds, Existing Information,
Non-Existing Information, Adverse Selection, Moral Hazard, Lemons Problem, Principal-Agent
Problem.
Introduction
A person asked God, “What surprises you most about mankind?”
God answered, “They lose their health to make money and then money to restore their health.”
Although life is less fleeting today than what it was a few decades ago and with life spans and life expectancies across the globe increasing, the future of the triumvirate of health, health care and health care costs continues to be an area of concern for Governments all
Lemons Problem and Health Insurance Fraud
Role of information asymmetry in inducing health insurance fraud.
By T S Rama Krishna Rao
Samuel B Sekar
Abstract
In insurance contracts inaccurate or false information results in distortion of truth. Imperfect information on the other hand results in adverse selection (lemons) and moral hazard. Imperfect information when performed intentionally, with unwarranted profit in mind, where one of the parties will be a victim to the cheating of the other, is a fraud. Insurance business is not immune to frauds though the “Principle of Utmost Good Faith” is one of the pillars, which assures the success of insurance operations. When this principle is breached, it disturbs an insurer’s capability in meeting its social and business obligations. This is what happens, when either the person buying an insurance plan or the one who provides insurance commits fraud, by giving or withholding information which misleads the decision making process. The information imbalance is called lemons problem, a form of “Asymmetry of information”. This paper focuses on health insurance frauds resulting from asymmetry of information – the lemons problem.
Important terms
Health Insurance Fraud, Asymmetric Information, Principle of Utmost Good Faith, Representations,
Warranties, Concealments, Mistakes, Non-disclosure, Demand Side Frauds, Existing Information,
Non-Existing Information, Adverse Selection, Moral Hazard, Lemons Problem, Principal-Agent
Problem.
Introduction
A person asked God, “What surprises you most about mankind?”
God answered, “They lose their health to make money and then money to restore their health.”
Although life is less fleeting today than what it was a few decades ago and with life spans and life expectancies across the globe increasing, the future of the triumvirate of health, health care and health care costs continues to be an area of concern for Governments all