Probable Maximum Loss

January 9, 2009

Probable Maximum Loss (PML) Assessments are a tool used to understand the seismic damageability of buildings.   A PML report predicts the amount of damage a building will receive as a percentage of the building’s replacement cost during the design seismic event, typically the 475 year earthquake (the largest earthquake in the next 475 years).  A PML is expressed as a percentage.  Most lenders treat PMLs under 20% as passing and they require retrofit or earthquake insurance for buildings with PMLs over 20%.

CMBS and Fannie Mae Lenders generally require a PML in seismic zones 3 and 4 (see zone map).

PMLs are used by the commercial real estate industry to understand the seismic risk associated with buildings and by the insurance industry.  The world where I work is the commercial real estate due diligence industry.  In my engineering practice I perform my PML reports to meet ASTM Standards: 

  • ASTM E2026 – 07 Standard Guide for Seismic Risk Assessment of Buildings
  • ASTM E2557 – 07 Standard Practice for Probable Maximum Loss (PML) Evaluations for Earthquake Due-Diligence Assessments

I explained the importance of these ASTM Standards in 2008 article in the Scottsmen Guide:  All About Probable Maximum Loss Reports.

The ASTM Standards allow for multiple mathematical methods for calculation the PML.  I advocate for the Thiel Zsutty methodology, the most widely use method for calculating Probable Maximum Loss within the commercial real estate industry.  Advantages of the Thiel Zsutty methodology are transparency and consistency.   A PML by this methodology is more peer reviewable.

In choosing an engineer for to perform a PML I advise my clients to look for the following qualifications:  registered engineer, 10 years experience with PMLs, and a clear understanding of the ASTM Standards.


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