Probable Maximum Loss Reports: Why Are They Required?

April 20, 2012 — 1,073 views  
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Probable Maximum Loss Reports (PMLs) are estimates of the largest losses that buildings or businesses in the buildings may suffer because of unforeseen seismic events. A PML report explains the maximum expected loss and is often expressed as a percentage of the structure's value. 

Credit officers and underwriters have an obligation to understand the basics of PMLs to use them effectively as underwriting tools. The point of the entire process is to allow these officers to protect their portfolios and investors from the effects of risks and catastrophes. While the reports cannot eliminate the risks associated with seismic events, they can absorb a great deal of the financial consequences that may result from damages or various other problems.

Scenario Expected Limit (SEL) and the Scenario Upper Limit (SUL) are two ways officers express PML for their assets. An engineer constructs a unique curve of expected outcomes during a 475-year period. The center of the curve is the SEL and the remaining 90 percent of the projected outcomes are labeled as the SUL.

In 2007, the ASTM E2026-07 Standard Guide for Seismic Risk Assessment of Buildings was released, recommending that lenders compare SEL to 20 percent, and stating that some mitigation is necessary if a building is above that number. This process may determine if a seismic retrofit or the inclusion of earthquake insurance would be appropriate.