Fraud is an important operational risk faced by insurance companies. Furthermore, operational risk has attracted much attention and has been managed by financial institutions since Basel Ⅱ. In banking, the agency problem arising from a loan is one kind of operational risk. In an insurance company, fraud arising from the behavior of the insured who is covered by the insurance contract is also an operational fraud hat is similar to that occurring in banking. Maintaining long-term relationships with customers is one possible way of managing the agency problem arising from loans in banking. In this paper, we investigate the possibility that maintaining a long-term relationship with the insured can mitigate the problem of fraud for the insurance company. We find evidence suggesting that the long-term customers of the insurance company are less likely to commit fraud when fraud is prevalent. Hence, maintaining a long-term relationship is also an important resource for the insurance company as it seeks to manage operational risk.
American Risk and Insurance Association 2013 Annual Meeting, 34p.