Basics of PML Estimation

1. PROBABLE MAXIMUM
LOSS & APPLICATION

2.  RISK DEFINED
 ELEMENTS OF RISK
 TYPES OF RISK
 PML DEINED
 PML APPLICATION
OUR DISCUSSION TODAY

3.  A probability or threat of damage, injury, liability, loss, or any other negative occurrence that is
caused by external or internal vulnerabilities, and that may be avoided through preemptive
action
 OR
 Risk implies future uncertainty about deviation from expected earnings or expected outcome.
Risk measures the uncertainty that an investor is willing to take to realize a gain from an
investment.
RISK DEFINED

4. Effect of uncertainty on
objectives
ISO 31000:2009

5. Munich re
Definition of
Risk
for NAT CAT

6. Hold on Mate is there more than
one definition of risk ??

7. With all due respect yes so moving on !!

8. ELEMENTS OF RISK

9. “An estimate of the monetary loss which can be sustained by
insurers on a Single Risk as a result of a single fire or explosion
considered by the underwriters to be within the realms of
probability. The estimate ignores such remote coincidence
and catastrophe as may be possible but which still remain
unlikely”.
“ defined by International Underwriters’ Association (IUA)
formerly known as London Insurance and Reinsurance Market
Association (LIRMA ) “
Probable Maximum Loss

10. Property
Energy
Engineering
APPLICABLE CLASSES

11.  Construction
 Occupancy
 Protection
 Exposures
COPE

12. Construction
 First consideration
 Relates to ability to withstand damage by fire and other
perils and wind
 Various Classes based on the strength and material
property used for construction

13. Other Considerations
 Age
 Building Height
 Fire Divisions
 Building Openings
 Building Codes

14. Occupancy
Ignition Sources
Combustibility
Damageability

15. Occupancy
 Habitational – apartments, hotels, motels, nursing homes
 Office – low hazard
 Institutional – schools, churches, hospitals, government
property
 Mercantile – department, hardware and specialty stores
 Service – dry cleaners, laundries, auto service stations
 Manufacturing – nature of product

16. Hazards
 Common hazards
 Housekeeping
 Heating equipment
 Electrical equipment
 Smoking materials

17. Protection
 Key may be location of water supply and fire hydrants
 Water hoses/ Fire detectors / Fire extinguishers
 Smoke detectors
5 - 17

18. EXAMPLE OF PML ESTIMATION
Block Building Value
Plant, Machinery &
Stock value (USD)
Total Block
Value (USD)
Assy Unit 2,000 4,000 6,000
Paint Shop 1,000 2,000 3,000
Store 200 800 1,000
Admin Building 750 250 1000
Total 3,950 7,050 11,000

19. PML GUIDELINES
Description Type
Solid non -
combustible
construction
Mixed
construction
Open sided
Construction
Building 5 – 25% 20 – 50% 30 – 80%
M/C Heavy 10 – 40% 15 – 50% 40 – 90%
Equipment Precision tools 25 – 80% 25 – 80% 70 – 100%
Stocks 40 – 100% 40 – 100% 70 – 100%

20. PML Calculation
Description of Risk
Class of
Construction
Asset
% Damage
Considered
Block Value
(USD)
Expected
Damage
(USD)
Building 25% 2,000 500
Machinary & Stocks 40% 4,000 1,600
Building 25% 1,000 250
Machinary & Stocks 80% 2,000 1,600
Building 25% 200 50
Machinary & Stocks 80% 800 640
Building 50% 750 375
Machinary & Stocks 60% 250 150
11,000 5,165 47%
Mixed
Store
Admin Building
Total
Solid Non
Combustible
Assembly Shop
Non CombustiblePaint Shop
Non Combustible
PML ESTIMATION

21. While in practice PML underwriting is a powerful tool in the hands of
underwriters, it has to be used with great care and diligence. The
disadvantages of the practice include
 PML is a subjective assessment of maximum severity of loss, and too
much reliance on it can prove costly. If actual loss exceeds PML, the
reinsurer will suffer.
 Judgment plays an important role in the determination of PML, and
may go wrong if made by inexperienced person.
 The lower the PML, the higher the underwriting capacity. Hence there is
a tendency to fix the PML on the lower side to generate higher
capacity. At the same time, the lower the PML, the greater the
possibility of the actual loss amount being higher than anticipated.
Dis-advantages of PML

22. Munich re - Publication on NAT CAT events
ISO 31000 definition of Risks
Sources of Information

23. ?QUESTIONS