Probable Maximum Loss (PML) Non Petrochemical Risks

PML- Historical Developments

Initially, all Property underwriting and reinsurance was done on the total sum insured per policy Insurers realised that they were ceding too much to reinsurance Insurers found that they could increase their net retentions by basing their underwriting and net retention first on the highest sum insured per location

PML- Historical Developments (contd.)

Experience proved that cession on the basis of highest sum insured per location was also not economical Therefore, insurers switched over to PML based underwriting for reinsurance which is being continued till now Different terms are used in the market for PML

PML - Abbreviations and Terms used in connection with the concept of Loss Estimates

PML PML PML MPL EML MEL

probable maximum loss possible maximum loss maximum probable loss maximum possible loss estimated maximum loss maximum estimated loss

Maximum Amount Subject

The amount of values (Material damage plus Business Interruption) subject to destruction by any one event under the most adverse conditions to that group of buildings and/or outside storage areas which are not separated from each other adequately to prevent spread of destruction Catastrophic conditions are excluded

MAS Assumptions made in Loss Estimation Exercise

Loss estimation done for most unfavorable conditions Fire Protection systems will not operate Fire doors will not operate and Party walls may not withstand the forces of explosion

PML - Definition

International Machinery Insurers Association (IMIA) has made the attempt to find some guidelines for P.M.L. evaluations. The group describes the P.M.L. as follows: The P.M.L. is an estimate of maximum loss which could be sustained by the insurers as a result of any one occurrence considered by the underwriter to be within the realms of probability. This ignores such coincidence and catastrophes as may be possibilities, but which remain highly improbable

PML- Another Definition

PML refers to the loss that will occur under normal conditions existing protection in service and functioning properly where it is reasonable to predict this based on prior performance and evaluation Normally, expressed as a percentage of total sum insured

PML - Use
The intended use of the PML is: to fix net retentions on and to control on the accumulation of commitments accepted referring to projects which are located in areas subject to the hazards of Acts of God like earthquakes, cyclones and inundation. Insured can plan insurance programme by opting higher deductibles

Assumptions made in PML Estimation

Available Public and Private fire protection systems function normally Plant Emergency Organization functions effectively as intended Takes into account Managements interest in Loss Prevention, Housekeeping, maintenance programme etc

PML Estimation Factors to be considered

Construction Exposure Occupancy Fire protection Systems Plant Emergency Organization Management Attitude