Probable Maximum Loss (PML)
The probable maximum loss (PML) is the largest loss expected at a location or for a risk under realistically adverse conditions; it serves as a measure of capacity and reinsurance requirements.
Concept
The PML answers the question: how large will a loss be if an event occurs and significant – but not all – protection measures fail? It therefore sits below the theoretical total loss (maximum foreseeable loss), which assumes all protection systems fail.
Determination
Risk engineers derive the PML from site surveys, fire compartments, separation distances, protection concepts (sprinklers, plant fire brigade) and interruption scenarios. For natural hazards, modelled return periods replace the single-case analysis.
Use
PML values determine how much capacity an insurer writes per risk, how co-insurance and layering are structured, and which reinsurance priorities make sense. Misjudgements directly affect the price and security of the programme.