Moral Hazard

Tag: Moral Hazard

Riesgo Moral

In our continuing series on how incentives shape behavior, we take a look across the sea to España, where a man tragically sawed off his arm to collect on eight insurance policies.  It seems that insurance fraud is on the rise in the depressed economies of Europe

According to data from the ICEA, which carries out research for insurance and pension providers, there were 54,114 fraudulent claims in 2003; in 2011, there were 130,959.

We, of course, have seen this sort of thing before.  And even before that.

But it turns out that it is not only the depressed economies of Europe that are seeing a rise in fraud.  Right here in the U.S. it appears that there is a rather substantial rise in Social Security Disability Insurance claims.  I had first heard about this on an EconTalk episode featuring David Autor.

Craig “Ironman” Eyermann at the Political Calculations blog has the numbers here and further elaboration here.


Please Do Not Try this at Home, Especially My Home

In our continuing series on moral hazard I ask you this: what is the opportunity cost &/or reservation price of your off hand?

Consider this:

Thirty-four-year-old Gerald B. Hardin faces six charges, including mail fraud for a 2008 incident in Sumter County where a man’s hand was cut off with a pole saw.

Federal indictments state that Hardin and another person used a saw to intentionally cut off the hand of a third person in an insurance fraud scheme. The indictment says the men submitted claims under a homeowner’s insurance policy and three accidental death and dismemberment polices.

It says the men received more than $670,000.

So the guy with the missing hand must have a reservation price pretty far south of $670,000, as the perpetrators split the ill-gotten booty three ways. You have to hand it to these guys, though, coming up with this sleight-of-hand to outwit their insurance providers.

Well, almost

I have to ad-mitt that the article doesn’t say that it was his off-hand. But, on the other hand, I bet the payout for the dominant hand is higher, but that is just an off-the-cuff conjecture.

Moral (Among Other) Hazards

Continuing on with our Halloween theme, here’s an old story just posted at Marginal Revolution that  illustrates the basic problems of moral hazard.

L.W. Burdeshaw, an insurance agent in Chipley, told the St. Petersburg Times in 1982 that his list of policyholders included the following: a man who sawed off his left hand at work, a man who shot off his foot while protecting chickens, a man who lost his hand while trying to shoot a hawk, a man who somehow lost two limbs in an accident involving a rifle and a tractor, and a man who bought a policy and then, less than 12 hours later, shot off his foot while aiming at a squirrel.

“There was another man who took out insurance with 28 or 38 companies,” said Murray Armstrong, an insurance official for Liberty National. “He was a farmer and ordinarily drove around the farm in his stick shift pickup. This day – the day of the accident – he drove his wife’s automatic transmission car and he lost his left foot. If he’d been driving his pickup, he’d have had to use that foot for the clutch. He also had a tourniquet in his pocket. We asked why he had it and he said, ‘Snakes. In case of snake bite.’ He’d taken out so much insurance he was paying premiums that cost more than his income. He wasn’t poor, either. Middle class. He collected more than $1-million from all the companies. It was hard to make a jury believe a man would shoot off his foot.”

It’s not often that I come across source material like this that I will use every single time a topic comes up in class.  I tested it out on Econ 300 today and I daresay the image is a lasting one.