Probable Maximum Loss (PML)
The largest loss a portfolio is likely to suffer from a single catastrophe event at a defined probability level (e.g. 1-in-100 years).
Probable maximum loss (PML) is the estimated maximum loss from a single catastrophe event at a defined return period — most commonly the 1-in-100 year (1% annual probability) or 1-in-250 year (0.4% annual probability) level. It is the primary metric reinsurers and rating agencies use to assess catastrophe exposure.
PML is modelled using catastrophe models (RMS, Verisk AIR, KCC) that simulate thousands of event scenarios and calculate the distribution of potential losses. A reinsurer with a Florida wind PML of $2bn at 1-in-100 years expects that in any given year, there is a 1% chance of suffering losses exceeding $2bn from a single Florida hurricane.
Reinsurance programmes are typically sized to cover a multiple of the PML — common practice is to purchase coverage to the 1-in-250 year level.
Example usage
“The reinsurer's peak PML is US wind at $3.2bn on a 1-in-100 year basis, driving its catastrophe reinsurance purchasing strategy.”
Frequently asked questions
What is Probable Maximum Loss (PML)?
The largest loss a portfolio is likely to suffer from a single catastrophe event at a defined probability level (e.g. 1-in-100 years). Probable maximum loss (PML) is the estimated maximum loss from a single catastrophe event at a defined return period — most commonly the 1-in-100 year (1% annual probability) or 1-in-250 year (0.4% annual probability) level. It is the primary metric reinsurers and rating agencies use to assess catastrophe exposure.
How is Probable Maximum Loss (PML) used in practice?
The reinsurer's peak PML is US wind at $3.2bn on a 1-in-100 year basis, driving its catastrophe reinsurance purchasing strategy.
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