Probable maximum loss (PML) is a concept commonly used in property insurance. It refers to an estimate of the maximum losses an insurer can incur if the insured property is completely destroyed. Total losses can occur if something disastrous happens to a piece of real property, like a fire razing a building to the ground.
Probable maximum loss is commonly expressed as a dollar amount. The insurance company could, for example, estimate that insuring a house could cost them $300,000 if it were totally destroyed. However, PML can also be expressed as a percentage of the total value of the insured property.
Insurance companies need to calculate the probable maximum loss before they agree to insure a property because they need to know what they stand to lose if such an event took place. Knowing the PML also helps them set the premium rates.
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