PROBABLE MAXIMUM LOSS & APPLICATION

RISK DEFINED

ELEMENTS OF RISK

TYPES OF RISK

PML DEINED

PML APPLICATION

OUR DISCUSSION TODAY

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

Effect of uncertainty on objectives

ISO 31000:2009

Munich re Definition of Risk for NAT CAT

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

With all due respect yes so moving on !!

ELEMENTS OF RISK

“An estimate of the monetary loss which can be sustained byinsurers on a Single Risk as a result of a single fire or explosionconsidered by the underwriters to be within the realms ofprobability. The estimate ignores such remote coincidenceand catastrophe as may be possible but which still remainunlikely”.

“ defined by International Underwriters’ Association (IUA)formerly known as London Insurance and Reinsurance MarketAssociation (LIRMA ) “

Probable Maximum Loss

Property

Energy

Engineering

APPLICABLE CLASSES

Construction

Occupancy

Protection

Exposures

COPE

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

Other Considerations

Age

Building Height

Fire Divisions

Building Openings

Building Codes

Occupancy

Ignition Sources

Combustibility

Damageability

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

Hazards

Common hazards

Housekeeping

Heating equipment

Electrical equipment

Smoking materials

Protection

Key may be location of water supply and fire hydrants

Water hoses/ Fire detectors / Fire extinguishers

Smoke detectors

5 - 17

EXAMPLE OF PML ESTIMATION

Block Building ValuePlant, 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

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%

PML Calculation

Description of RiskClass of

ConstructionAsset

% 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 Combustible Paint Shop

Non Combustible

PML ESTIMATION

While in practice PML underwriting is a powerful tool in the hands ofunderwriters, it has to be used with great care and diligence. Thedisadvantages of the practice include

PML is a subjective assessment of maximum severity of loss, and toomuch reliance on it can prove costly. If actual loss exceeds PML, thereinsurer will suffer.

Judgment plays an important role in the determination of PML, andmay go wrong if made by inexperienced person.

The lower the PML, the higher the underwriting capacity. Hence there isa tendency to fix the PML on the lower side to generate highercapacity. At the same time, the lower the PML, the greater thepossibility of the actual loss amount being higher than anticipated.

Dis-advantages of PML

Munich re - Publication on NAT CAT events

ISO 31000 definition of Risks

Sources of Information

?QUESTIONS