PAGE 5 PROTECTING YOUR PROPERTY ® 877.482.1234 | aiblc.com Sheila E. Salvatore, Editor | Editor@AdjustersInternational.com Copyright © 2020 Adjusters International, Ltd. All Rights Reserved. E06-1021 Insights for Your Industry® is published as a public service by Adjusters International, Ltd. It is provided for general information and is not intended to replace professional insurance, legal and/or financial advice for specific cases. Navigating a Hardening Property Market Continued Next, we will discuss Probable Maximum Loss, as mentioned earlier. This is a point every risk advisor should understand well. Understanding Probable Maximum Loss (PML) Probable Maximum Loss is the expected loss at a given location in the event of a fire or other catastrophic event, quantified and expressed in a dollar value or percentage. While underwriters use this tool to forecast potential loss scenarios, it is a good practice for any organization to use in-house as well. By multiplying the value of the business property by the highest expected loss percentage, you will be on your way to get the PML. The tricky part is determining the value of the business property and the expected loss percentage. Scenario: Manufacturing Company XYZ has five locations and each has the same set of business property, with the same values. To calculate the PML, we will assume that the business property at location number one has a value of $125 million. We will then assume that the risk measures in place will mitigate the highest expected loss by 20 percent. By then multiplying the $125 million by 80 percent (the highest expected loss percentage), we have our PML of $100 million for location number one. Since we know that each location has the same set of assets and values, we can go a step further and calculate the PML for the entire organization’s five locations giving us a PML of $500 million. While the PML is not the true replacement cost of the business property, it is a good practice and method to understand when reviewing property insurance and evaluating the organization’s risk. Now that we understand what a hard market is, and the potential impacts, we can better navigate methods to prepare our organizations. Note that this scenario does not consider business income valuations and the potential loss of business income associated with the physical loss to the business property. How to Best Prepare Your Organization for a Hard Market Conduct a Risk Assessment • Asset identification • Risk analysis • Risk likelihood and impact • Costs of solutions
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