Brokers and the control of postcontractual opportunism in the Nigerian insurance market
| Published date | 11 May 2010 |
| DOI | https://doi.org/10.1108/13590791011033917 |
| Date | 11 May 2010 |
| Pages | 223-239 |
| Author | Tajudeen Olalekan Yusuf |
| Subject Matter | Accounting & finance |
Brokers and the control
of postcontractual opportunism
in the Nigerian insurance market
Tajudeen Olalekan Yusuf
Department of Actuarial Science and Insurance,
Faculty of Business Administration, University of Lagos, Lagos, Nigeria
Abstract
Purpose – The purpose of this paper is to examine how insurance brokers control opportunism at the
postcontractual stage of insurance contract in the Nigerian insurance market. Such opportunism,
widely reported of insurance commercial customers, threatens the survival of the entire insurance
institution while brokers’ role is grossly ignored.
Design/methodology/approach – The paper involved the use of semi-structured interviews of
insurance broking executives and documentary analyses of how insurance brokers gather and pass on
information between clients and insurers to control opportunism in the insurance market.
Findings – Findings suggest that the involvement of the insurance brokers from the claim
notification stage, claim auditing to actual settlement and dispute mediation are instances of control
over customers’ opportunistic tendencies. Also, it is found that fear of reputation damage and brokers’
professional way of handling clients’ over-exaggeration and suspicious claiming might considerably
control insurance opportunism.
Practical implications – Involving insurance brokers in the claim settlement stage is capable of
reducing insurers’ claim auditing costs while guaranteeing hassle-free claiming experience for
customers and boosting the image of the insurance industry. Hence, findings are relevant for insurance
companies and regulators desirous of controlling opportunism in the insurance market.
Originality/value – The paper extends the marketing role of brokers to the claim settlement stage
by highlighting their potentials to control clients’ opportunistic behaviours which threaten the
insurance market.
Keywords Insurance services,Insurance companies, Nigeria
Paper type Research paper
1. Introduction
Insurance opportunism has been recognised as a serious economic problem whereby
insurance customers deprive the system of resources as well as obtain undue benefit
from it (Derrig and Krauss, 1994). This happens when they mask their true risk-type
while applying for insurance and when they are making claims for fabricated or genuine
claims. It is a common knowledge that policyholders have the ability to use their
informational advantage to make false declarations in order to be effectively covered or
to pay lower premium (Alary and Besfamille, 2001) or to report inflated losses or losse s
that have not happened (Schiller, 2003). The latter has far more been widely reported for
insurance customers (Artis et al., 2002; Dionne and Gagne, 2002; Loughran, 2005).
While insurance intermediaries contribute to enhancing transparency in insurance
markets due to the information asymmetries characterising them, they have been
systematicallyexcluded from using theirposition to deterring opportunistic tendenciesof
insurance customers. As a result, thereappears a begging vacuum in thearea of study of
The current issue and full text archive of this journal is available at
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Postcontractual
opportunism
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Journal of Financial Crime
Vol. 17 No. 2, 2010
pp. 223-239
qEmerald Group Publishing Limited
1359-0790
DOI 10.1108/13590791011033917
operationalmodel of bridging of information gapby insurance intermediaries to stemthe
tide of all forms of insurance opportunism. This researchis intended to fill this vacuum.
Scholars have observed that under moral hazard in insurance market, customers are
rarely prosecuted and insurance companies appear to pay many claims tha t they
suspect of being fraudulent or exaggerated. Hence, both the probability of fraud
detection and the severity of detection penalties are low. Moreover, the insured has no
incentive not to want to recoup his premium or the deductible paid earlier to procure
the cover in the first place (Tennyson, 1997).
Consequently, insurers have deviced various strategies to control the trend. Such
strategies involve contract-design (Townsend, 1979; Picard, 2000; Boyer, 2004) and
audit (Crocker and Morgan, 1998; Major and Riedinger, 2002; Morse, 2005; Morley et al.,
2006) approaches. Surprisingly enough, these two major approaches in the literature
have achieved minimal results with insurance opportunism assuming increasingly
global dimension. This may not be unconnected with several factors.
First, insurance contracts are inherently conducted under the atmosphere of
informational asymmetry due to its intangibility (Devlin and Ennew, 1997). This
means that the information of the subject matter of insurance is tilted more to the side
of the applicant (prospective insured) than the insurer. The second factor relates to bad
attitudes on the part of the public which view insurance opportunism as a crime of easy
money with little risk of getting caught, or of few serious consequences if they are
caught (Tennyson, 1997). Third, people believe they are entitled to commit fraud after
paying high premiums with no or few losses for many years. Fourth, too many insurers
are in denial about the scope of fraud and its impact on their bottom lines (CAIF, 2000).
A broker or other insurance intermediary is employed to act as a middle man
between the person employing him – normally, the person requiring insurance – on
the one hand, and the proposed insurer or insurers on the other[1] (Lowry and
Rawlings, 2005, p. 57). They take an important position as match-makers between the
supply and demand sides on insurance markets. On the one hand, they provid e
distribution and marketing services for insurance companies; on the other, they supply
informational and advisory services for consumers. Insurance intermediaries assist in
concluding an insurance contract by economising on information and transaction costs
(Eckardt and Rathke-Doppner, 2008).
It is founded on the assumption that the more involved and rigorous the information
gathering role of the broker at the postcontractual stage, the more difficult it is for
customers to perpetrate opportunism.Insurance customers, particularly,the commercial
clients,are always under the assumptionthat exaggerating claimsis victimless crime and
given the cost-benefit analysis will file fraudulent claims (Becker, 1968).
The first objective of this paper is to explore how insurance brokers control the
insuranceopportunism perpetratedby their customers when theysuffer any loss, damage
or liability at the postcontractual stage. Second, the paper also aims to examine how
brokers treat suspicious and contentious claims from their clients at this stage of the
insurance contract if they must satisfy the interests of both clients and insurers.
For the purpose of clarity, the focus of this study is the claims opportunism (fraud)
in the commercial general insurance market. In addition, the word “opportunism” shall
be used mainly in this study as an embracing word that includes fraud and other
opportunistic behaviours that insurers may refer to as petty while customers are filing
claims for settlement.
JFC
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224
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