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.
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