CAT Model - PML

Insurance companies use CAT models to estimate potential losses from CAT events. These models generate a wide variety of outputs used for underwriting, pricing, risk transfer, and capital management. PML is one example that a CAT model might provide. PML also called Probable Maximum Loss, is an estimate of the maximum loss that an insurer could reasonably expect to experience. This is typically expressed for different return periods (like a 1 - in - 100 year event). The 1 - in -100 year PML is the loss level that is exceeded with the average frequency of once in 100 years. The higher the return period, the more severe the loss scenario. PML is calculated based on a wide variety of factors such as the type and location of the risk, historical loss data, scientific understanding of the catastrophe risk and various assumptions. PML is a valuable tool for insurers and reinsurers in pricing their policies, setting their reserves, managing their capital, and determining how much reinsurance to purchase.