Frauds and moral hazard in insurance


The paper analyzes the problem of moral hazard and fraud as well as their presence in the insurance market. The moral hazard is the behavior of the insured person who, after he concluded insurance contract, shows behavior unsuitable to the insurance company. This behavior lacks, or contains to a lesser extent, what the owner of the uninsured property would do in order to prevent the occurrence of a harmful event or to minimize chances of its occurrence. The problem of moral hazard is difficult to detect in time and to control successfully. It can occur in all forms of insurance. Unlike fraud, which disclosure opens up the possibility of damages repayment, when the moral hazard is in question, the damage caused by it affects the weaker-informed party, and in the case of insurance it is the insurance company. Moral hazard and the payment of false claims increase the cost of insurance business and result in higher premiums for all insured. In periods of economic crisis, the value of a property may fall below the value of the sum insured, which could constitute a motive for the destruction of one’s own property in order to get insurance paid. This is illustrated in this paper by analyzing the fire reports published in the Vreme magazine in 1930 and 1931, when the economic crisis in Yugoslavia was on the rise. Total of 241 fire reports were taken into consideration (89 from 1930 and 152 from 1931), and then the causes of the fire were analyzed. Particular attention has been paid to the reports that describe cases of arson and insurance fraud.