” How to calculate Estimated Maximum Loss (EML) and Probable Maximum Loss (PML)”
Association of British Insurers (ABI) has made the following recommendations with regard to calculation of Estimated Maximum Loss (EML) and Probable Maximum Loss (PML).
1. Calculation of Estimated Maximum Loss (EML) (in bold)
In the case of calculation of estimated maximum loss, sudden catastrophic loss or Act of God is not taken into consideration. It is calculated on the basis of a single accident.
Various elements which may either increase or reduce the intensity or ferocity of fire are taken into consideration. They are:
a. Fire Services vehicles arriving at the scene of fire in good time.
b. Availability of sufficient and reliable sources of water.
c. Automatic devices installed in the premises for detection of fire.
The following elements are excluded for the purpose of calculation of EML (in bold).
a. Presence of fire wall or fire door.
b. More than one seat of fire.
c. Automatic Sprinkler System installed in the premises.
2. Calculation of Probable Maximum Loss (PML) (in bold)
It is a conservative method of calculating probable maximum loss.
A. Fire Detection System (in bold)
It excludes or does not take into consideration the following fire detection system installed in the premises.
a. Fire Alarm System.
b. Smoke Detector etc.
B. Fire Protection System (in bold)
Similarly the following fire protection systems available in the premises are excluded for the purpose of calculation of PML.
a. Automatic Sprinkler System installed in the premises.
b. Fire Hose Reel/Fire Hydrant .
c. Fire Extinguishing Cylinders (CO2 type, Dry Powder type, Foam type etc.)
d. Fire Blanket.
It is hoped that the above methods of calculation of “EML” and “PML” recommended by ABI shall be found useful to those for whom this article is intended.
Please note that this calculation is apparently based on the premise that despite all fire fighting facilities available/installed, say in a factory, they just fail to work or become non-operational or inactive at the time of fire for whatever reason.
To simplify matters let us take the below example.
Let us say there are 2 units of buildings (Building No. 1 used as a factory ) and (Building no. 2 used as a godown) situate in one compound forming one risk.
In order for each building to be treated as a separate risk, they should be separated from each other by a distance of at least 15 metres in between.
Now in order to calculate PML for the risk in our example,let us say TSI for this risk is Tk 10 crore.
Sum insured for building no. 1 is Tk 8 crore
Sum insured for building no. 2 is Tk 2 crore
For the purpose of calculation of PML in this case, it should be calculated on the basis of the highest sum insured in building no. 1. (assuming that building no. 1 catches fire).
Therefore for this risk the overall PML will be 80% (Tk 8 crore out of TSI of
Tk 10 crore).
If the two buildings are not 50 feet apart, then PML should be calculated at 100%
Trust above clarifies matters.
You may please include this example in the article for readers to understand how PML works.
Mr. Haque was brought up and educated in Dhaka. He obtained his master’s degree with honours in Biochemistry from University of Dhaka (DU). He spent nearly four decades in Dubai (UAE) working for several multinational insurance companies in various capacities. He obtained his Fellowship (FCII) from The Chartered Insurance Institute (CII), London, Associateship (AIRM) from The Institute of Risk Management (IRM), London, Associateship (ACIArb) from The Chartered Institute of Arbitrators (CIArb), London. He has authored several books on insurance which have been acclaimed both at home and abroad. He contributes regularly on insurance matters in various online insurance news portals and is a founder General Secretary of Bangladesh Insurance Professionals Society (BIPS). Presently Mr. Haque is serving as the Director of Sadharan Bima Corporation, Dhaka.