Keywords: construction insurance, risk management.

Contractor's All Risks Insurance (CAR) is a widely applied risk-transfer approach in the construction industry in Taiwan. However, the local architect/engineering/construction (AEC) owners and contractors lack of the knowledge of the functions and requirements in insurance practice. Therefore, they not only ignore the importance of the analysis of the loss data but also make insurance decision subjectively and thus a lot of disputes on insurance coverage, insured amount and indemnifying process occurred. To optimize the cost-effectiveness of the premium as well as to retain the objective of transferring the risks, the selection of an appropriate insurance program becomes a significant issue for construction projects.

The purpose of this research is to develop an insuring decision model for CAR based on the insurance practice in Taiwan. The model is able to assist the owner assume the deductible ceiling value on insurance-related clauses of construction contract. It is also able to provide the contractor suggestion on optimal insurance conditions, such as deductibles and insured amount.

The CAR insuring decision model includes two parts: insurance cost model and insuring model. The insurance cost model is composed of three sub-models. They are the loss distribution model, the evaluation model of general premium, and the experience modification rating (EMR) model. First, we integrate statistical methods, such as the method of maximum likelihood and the test of goodness-of-fit, with the analysis of insurance clauses and the loss records to establish the loss distribution model. The loss distribution model is helpful for project risk management applications. Next, multiple regression analysis is applied to formulate the evaluation model of the general premium, and the statistical decision theory, credibility theory and other statistical methods are utilized to obtain the EMR model, which reflects the difference between the individual risk of a specific contractor and the pooled risk of all contractors. These two models can quantify and reflect the loss experience of the insured to ratemaking practice of CAR insurance.

On the other hand, this research establishes the deductible ceiling model based on the concept of loss retention capacity (LRC). According to this model, the owner can select an appropriate ceiling level of deductions to avoid the contractor having a financial crisis and the resulting project failure. Otherwise, based on the computation of insurance cost model and Monte-Carlo simulation, the insurance cost under different insurance conditions are obtained respectively. Therefore, this research utilizes the concepts of efficient frontiers and indifferent curves to develop an insurance condition decision model, which develops the methodology, Efficient Frontier of Insurance Conditions (EFIC), based on theory of investment portfolio selection. The insurance condition decision model suggests appropriate deductible values and insured amounts.

Finally, a highway tunneling projects is utilized as an illustrating example for model verification and validation, and successful and satisfactory results have been obtained. The developed decision model is planned to be extensively tested with many construction firms in the near future.

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