Possible maximum loss: what really determines your property insurance costs?

Many companies start with the premium when discussing insurance. Insurers almost invariably have a different starting point: the PML.

The PML is a technical estimate of the worst possible financial impact in an extreme disaster scenario. Crucially, it doesn’t refer to the most likely scenario: it envisages a situation where everything goes wrong at once.

In the case of a fire, for example, this means sprinklers failing to work, fire doors failing to close, maximum fire spread and production grinding to a complete halt.

Importantly, the PML is not confined to material damage. Business interruption is also a vital factor: production losses, decreased revenue and reliance on suppliers or customers in the supply chain. This is why insurers also want to know about the business continuity plan during inspections.

An accurately calculated PML is essential, as a different technical assessment regarding a fire can easily mean a difference of millions of euros in terms of loss value, insurable capacity and premiums.

In addition to PML, insurers also look at the EML – the estimated maximum loss.

While the PML assumes a scenario where everything that could go wrong does go wrong, the EML is based on a more realistic situation, where existing safety and protection systems function as intended.

That difference is crucial.
The EML shows companies where risk prevention investments truly pay off. That could mean anything from structural measures and verifiable maintenance to training, safety discipline and well-developed emergency and intervention procedures.

Although insurers focus heavily on the PML, the EML makes it clear what is manageable and feasible in practice. The closer a company stays to its EML, the more limited the impact when things do actually go wrong.

In terms of fire, two parameters decisively influence the PML.

1. Distance between buildings
A fire must not be able to spread to another building due to heat radiation or combustible materials. If the distance is insufficient, the insurer will treat multiple buildings as a single fire zone.

The consequence? The values will be aggregated and the PML will rise significantly, with a direct impact on premiums and capacity.
The required minimum distance depends on factors such as building height, proportion of unprotected openings, type of construction material and the insurer’s guidelines.

2. Fire walls
Not every wall referred to as a ‘fire wall’ will really be classified as one for PML purposes.

A genuine PML fire wall effectively prevents the spread of fire and heat radiation for a predetermined period. In reality, many so-called fire walls turn out to be merely fire-resistant partitions that aren’t enough to create separate fire zones. 

Among other characteristics, a true PML fire wall is:

• constructed of reinforced concrete
• able to contain fire for at least four hours
• free from service penetrations
• structurally stable and unlikely to collapse

If a wall fails to meet these criteria, everything within the same fire zone will be included in the PML assessment.

The illustrated industrial site has several buildings, each with its own value.

• Buildings with sufficient spacing between them are marked with green arrows.
• Buildings with insufficient spacing are marked with red arrows.
• The yellow line running through the largest building represents a PML fire wall.

On a site with multiple buildings, the total site value might seem decisive at first glance. In reality, everything hinges on the relevant worst-case scenario.

When there is sufficient distance between specific buildings and a properly constructed fire wall effectively isolates the largest building, the potential maximum loss arises not at site level, but within a defined zone.

In this example, that results in a PML of 50 million euros rather than the total site value.
In the absence of a technically substantiated alternative approach, an insurer may treat multiple buildings as a single fire zone, resulting in a significantly higher PML.

This is where the real value of expert guidance is clear.

A well-substantiated PML ensures:

• greater predictability for insurers
• the avoidance of unnecessarily high premiums
• the optimisation of insurable capacity
• fewer disagreements during underwriting and claims processing
• targeted investments with demonstrable impact

With risk costs on the rise, the importance of critically assessing the PML is growing, particularly for fire risks.

A few extra metres of separation or a single correctly constructed wall will sometimes make the difference between manageable damage and a loss amounting to tens of millions of euros.

Vanbreda Risk & Benefits does more than just arranging insurance.
Our loss prevention consultants guide clients in keeping their PML as low as possible and ensuring that their risks remain manageable, both now and in the long term.

We also advise on construction and renovation projects, focusing on sustainable returns, insurability and robust risk management. By doing so, we ensure that if things do go wrong, the impact is as close as possible to the EML scenario rather than escalating into a worst-case PML.

Any questions?  Contact us at riskengineering@vanbreda.be.