Research Article

Insurance Crisis, Legal Environment, and the Sustainability of Professional Liability Insurance Market in the Construction Industry: Based on the US Market

Table 3

Model parameter.

ParameterDescription

rProfessionals are required to pay premiums. The premium level directly affects the enthusiasm of professionals for becoming insured, and the insured professionals are the source of funds that allows insurance companies to form risk pools.
pProfessional liability accident probability. The probability of professional liability accidents is related to the kind of professional and individual practice level. It is one of the most important bases for calculating premiums and an important indicator for the government to measure the overall industry risk and individual skill level. For the simplified analysis and calculation, the value is the industry average, and (0 <  < 1), that is, all professionals who are insured and uninsured, without considering influencing factors, such as moral hazard after obtaining insurance.
qExpected loss of professional liability accident. The economic losses caused by occupational liability accidents in the construction industry often far exceed the fixed assets of technology-based enterprises. Once an accident occurs, the enterprise may face bankruptcy, and the liability of professionals may not be implemented. For public engineering accidents in particular, the impacts of social, political, and credit issues, etc., are important factors the government is extremely concerned about.
aCredit income generated by professionals after insurance. This mainly includes the potential benefits in credit guarantees, as well as the competitive advantages in the bidding process. The size of credit benefits is related to the completeness of the market credit system and the reward and punishment system formulated by the regulatory authorities.
sProfessionals are willing to become insured, but there is no suitable liability insurance product, and the result is noninsurance risk control expenditure. Professionals will transfer the risk to the service price or choose to exit the market directly to avoid the risk. In an environment with high overall risk prevention awareness, professionals will also be exposed to various noninsurance risk control expenditures and indirect losses, such as limited business scope and low credit rating.
hThe amount paid by the insurance company after the professional liability accident. After the accident, the effective compensation amount of the insurance claims confirmed by both parties is usually less than the direct economic loss caused by the accident. Therefore, this paper assumes that h < q.
nNumber of professionals insured, as the more the people insured are, the larger the risk pool of the insurance company is, and the stronger the company’s ability to pay.
mNumber of insured professionals who have experienced liability accidents within a certain time interval (such as one year), which directly affects the insurance company’s claims.
dPLI business underwriting start-up costs. This part mainly includes start-up costs, such as publicity, inspection, and development, as well as late-stage underwriting costs.
bOpportunity cost incurred by insurance companies without PLI business.