Probable maximum loss

Probable Maximum Loss (PML) is a term used in the insurance industry as well as Commercial Real Estate. Although the definition is not consistent in the insurance industry, it is generally defined as the value of the largest loss that could result from a disaster, assuming the normal functioning of passive protective features (i.e. firewalls, nonflammable materials, etc.) and proper functioning of most (perhaps not all) active suppression systems (i.e. sprinklers). This loss estimate is always less than (or in rare cases, equal to) the Maximum Foreseeable Loss, which assumes the failure of all active protective features. Underwriting decisions can be influenced by PML evaluations, and the amount of reinsurance ceded on a risk can be predicated on the PML valuation.