The Optimum Professional Liability Insurance Contract Design for Supervising Engineer

Abstract

Because there is a principal-agency relationship in professional liability insurance for supervising engineer, there is a need to introduce principal-agency theory into this field. We used the common hypothesis in principal-agency theory for reference to establish model structure, and we treated the compensation of insurance company as the incentive contract. The conclusion is that, when compensation amount takes place, the optimum effort level would lead to that insurance company need pay insurance premium as compensation under information symmetry. However, due to the universal existence of information asymmetry, the optimum effort level cannot be realized, so the compensation amount of insurance company under information asymmetry should be less than the compensation amount of insurance company under information symmetry.