Probable maximum loss (PML)

Category: Pricing & rating · Reviewed by Al Jabbar, Broker · Specialist Risks · Last reviewed

Probable maximum loss (PML)

Probable maximum loss (PML) is the largest loss the insurer expects to suffer from a single defined event, taking into account expected functioning of loss-mitigating features. It is a key concept in property risk underwriting, treaty reinsurance and natural catastrophe modelling.

Definitional caution

There is no universal PML definition. Practitioners distinguish:

• EML — Estimated Maximum Loss — the loss expected under normal conditions and functioning of installed protection.
• PML — Probable Maximum Loss — typically loss assuming some failure of protection.
• MFL — Maximum Foreseeable Loss — total loss assuming complete failure of protection.

Definitions vary materially by market and risk type. Cat-model PML is typically expressed as a return-period number (e.g. “1-in-250 OEP PML”).

Use

• Property underwriting — setting line size, capacity allocation, deductibles.
• Reinsurance programme design — placing limits above the chosen PML.
• Solvency II SCR — non-life cat risk module references vendor-modelled OEP at a 200-year return period for the standard formula and internal model calibration.
• Rating agency capital adequacy — AM Best and S&P request PML disclosures.

References

• IFoA. Practical guides — non-life capital modelling.
• PRA SS18/13.
• Swiss Re publications on PML.

Cross-references

• PML
• Maximum foreseeable loss
• MFL
• Estimated maximum loss

---

Maintained by Matt Bartlett, Director, Apex Insurance Brokers Limited. FCA FRN 724952. Companies House 07014570.