Glossary

Probable maximum loss (PML)

An estimate of the largest loss a location, portfolio or event is likely to produce, used to set limits, size reinsurance and satisfy lender requirements.

Also called: PML, maximum probable loss, PML estimate, return-period loss

Probable maximum loss is the largest loss an owner or insurer should reasonably expect from a single event, as distinct from the worst conceivable outcome. It is used in two ways.

Property underwriters of large locations often separate three measures: normal loss expectancy (fire protection works as designed), probable maximum loss (some protection fails) and maximum foreseeable loss (all of it fails). Insurers define these differently, so ask which one a report means. A sprinklered warehouse may have a PML that is a small share of its value, while an unsprinklered one may be near total.

In catastrophe modeling, PML is the loss at a stated return period. The 250-year earthquake PML is the loss with a 0.4% chance of being exceeded in any year, since 1 ÷ 250 = 0.4%. A catastrophe model produces it from the buildings' locations, construction and values in a statement of values. Lenders may require earthquake coverage when a seismic study puts PML above a set share of building value, and insurers use PML to size their treaty reinsurance.

The pitfall is false precision. A PML is a model estimate with wide error, and a 100-year and a 500-year figure are different questions. It does not cap what a single event can cost. The guide on catastrophe models: how insurers price hurricanes, quakes and fires explains how the models work.

Last reviewed October 10, 2026

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Related terms

Catastrophe model Software that simulates thousands of hurricanes, earthquakes and other disasters against a portfolio of locations to estimate insured losses and odds. Statement of values A schedule listing each insured location with its building, contents and income values and construction details, used to rate and model a property program. Treaty reinsurance A reinsurance contract that automatically covers a defined portfolio of an insurer's policies, instead of reinsuring one risk at a time. Rate on line The premium for a layer of reinsurance or excess coverage divided by that layer's limit, showing the price paid for each dollar of protection. Insurance to value Carrying a property limit that matches the full value of what you insure, so a loss is paid in full and no coinsurance penalty applies.

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