What Exactly is Probable Maximum Loss?

A Probable Maximum Loss report (PML) is an important tool used to evaluate how a building may behave during a seismic event, which in turn helps determine the buildings financial risk. Real estate investors, developers, property owners, and lending institutions need this information to make informed decisions regarding assets, especially in earthquake prone areas.

The methods engineers use to calculate PMLs can vary greatly. The American Society of Testing Materials (ASTM) standards created in 2007, ASTM E2026-07 Standard Guide for Seismic Risk Assessment of Buildings and ASTM E225 Standard Practice for Probable Maximum Loss (PML) Evaluations for Earthquake Due-Diligence Assessments, have helped create consistency but more detailed information about the needs of the client can have a deciding factor in which method an engineer may use to calculate a PML.

Characteristics such as building type, critical connections, local soil conditions and local seismic activity are evaluated and used to calculate the PML value, which is expressed as a percentage of the dollar value of the damage in terms of the building’s replacement cost.  This can be calculated for a 50 year earthquake and a 475 year earthquake (the difference is in magnitude and the analogy of 10 and 100 year floods is often made). These factors, along with statistical data and observed damage to unreinforced buildings, go into widely used and accepted formulas to derive a theoretical model.  The PML report predicts the amount of potential damage a building will sustain when each of these 50 and 475 year earthquakes occur.

It should be noted that the PML estimates the likely cost of damage to a property due to a probable seismic event, not guarantee how the property will perform. The PML report actually reads as such, expressing seismic damage as a percentage intended to represent expected damage of a building divided by the replacement cost of the whole building. Many lenders have a pass or fail type system with the PML percentage. Generally, a building with a PML lower than 20% is acceptable and one with a PML over 20% is considered to have more risk and may require mitigation in the form of insurance or retrofitting, both of which can be expensive.

 

For upcoming webinars on Seismic Risk Assessments, PMLs and commercial real estate due diligence, visit http://www.partneresi.com/partner-webinars.php.

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