What is Estimated Maximum Loss? Definition & Examples.

As part of our ongoing insurance glossary series we continue to explore the terminology and practices used in the Insurance world.

Today we will be looking at Estimated Maximum Loss as follows:

  1. What does Estimated Maximum Loss mean ?
  2. What factors effect Estimated Maximum Loss ?
  3. How do Insurers use Estimated Maximum Loss to control their business ?

What does Estimated Maximum Loss mean ?

As its name would suggest this is an estimate only based on experience, there is no exact formula that Insurers use to arrive at this figure.

It is an estimate of the maximum probable loss that can develop from an Insured peril – generally speaking the perils involved will be those relating to material damage of a property or the consequential loss that follows.

An alternative term commonly used is Probable Maximum Loss.

What factors effect Estimated Maximum Loss ?

In considering the maximum loss that they may incur Insurers will take into account both the good features of a risk and the bad.

Good features may involve a wide range of fire protection systems, automatic sprinklers, portable extinguishers and the proximity of the property to the neares fire station.

Bad features may include combustible construction of the building (timber floors, thatched roof), storage of flammable liquids, limited fire protection systems, no local fire station, location near to a river with a known flood history.

It is the balance of these two factors that will help Insurers to determine the maximum loss that they are likely to incur.

A risk with a high Estimated Maximum Loss will normally attract a premium loading.

Insurers surveyors may suggest a means that can be adopted by the policyholder to help reduce the risk and if these requirements are adopted a rating discount may be available.

How do Insurers use Estimated Maximum Loss to control their business ?

An Insurer would clearly not want to have too many risks where there was a 100% Estimated Maximum Loss but in some cases this is unavoidable due to the circumstances of the risk and a large number of bad features.

This does not mean to say that Insurers will not cover the risk but they may in the case of a very large risk seek to re insure some of the cover with other Insurers so that they can spread a serious loss betwen them.

Insurers can use the Estimated Maximum Loss figures that they have to determine a worst case scenario, and then set their rating accordingly for this overall class of business. This is possible as two factors are known, the premium income and the Estimated aximum that they may have to pay on claims.

Insurers will also seek to avoid a number of risks with a high Estimated Maximum Loss in the same area, this is referred to as accumulation which will be covered in a future topic.

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    1. Hi Francis,

      I cannot really think of any disadvantages – EML is just a business tool that is used to determine a maximum possible risk – the more factors like this that can be calculated the better as they give the insurer a better understanding of their exposures.


  1. the above research work is too general.i wanted to know EML in detail,that is its relevance in writing business as well as factors that are considered for a particular risk eg. under a fire policy

    1. Hi Enard,

      The article shows the main factors that an Insurer could use in determining an EML on a Fire Policy – these would be sprinklers, proximity of nearest fire station, construction, extinguishing appliances etc.

      EML is a tool used so that Insurers can calculate their maximum possible exposure on a risk – without this they would not be able to quantify the risks that they are exposed to.


  2. the above research work is kinda general.i need a detailed analysis of EML including its practical relevance in writing insurance business as well as factors that determine EML for a particular risk undertaking eg.under a fire policy

    1. Hi Enardie,

      The article shows the main factors that an Insurer could use in determining an EML on a Fire Policy – these would be sprinklers, proximity of nearest fire station, construction, extinguishing appliances etc.

      EML is a tool used so that Insurers can calculate their maximum possible exposure on a risk – without this they would not be able to quantify the risks that they are exposed to.


    1. Hi Junior,

      EML is a very useful tool for Insurers to gauge the maximum amount that they may have to pay out on a claim on a given policy.

      The accumulated total of all of these EML’s can be used to set aside reserves within the Insurers accounts and hence calculate their potential profitability.


  3. You said that EML has no exact formula and its value is estimated on experience. So this experience you reffering to is past events and the costs that rsulted from those past events? I’m battling to understand how you arrive at a value for EML that is quite accurate even though its an estimate…can you perhaps help?

    1. Hi Rochelle,

      Yes it would be based on many years of experience and analysing data from similar types of losses.

      Key facts in here are construction and fire prevention methods

      Although an estimate previous trends on certain types of buildings would be pretty accurate. For example timber construction with few fire appliances and a long distance from fire service would most likely result in a total loss.

      There is no exact formula but insurers would tend to look at the worst case scenario

  4. Hi, I was wondering if someone could help me.

    I’m busy doing an assignment about how a ship sank and the qestion basically asks me to draw up a risk profile. The did not include in the case study any past eventsa. They only told us how the ship sank. I have to calculate the EML, the probability and annual cost for the different types of loss or damamge. I can’t seem to figure out how to calculate the EML. The Question also gave me a replacement value, a contribution to profit, the time period it will take to recover and the estimated cost of a human life.

    I see that colink wrote (above) that there is no exact formula, so how am I supposed to calculate it?

    Help, please.

    1. Hi Alex,

      Maximum Loss limit is the maximum limit that a policy will pay out to, maximum probable loss is an estimate of what the biggest claim is likely to be – a payout would not be limited to this figure

  5. EML is conducted by a consultant Engineer (or risk surveyor) hired by an insurance company or a broker. He should visit and inpect the insured’s site, and select about Top Tisk. Top risk is considered in severity of a consequantal event, not frequency. Inspection report must describe detail information of EML (or PML) because it is most important to underwriter in order him or her to decide how much of risk retention and rating of the property. In other words, EML of the insured property is high, the underwriter would decide to keep its risk as little as possible or reject. Therefore, underwriters like to have low EML properties.

    1. Hi Maria,

      They are different terms for the same thing – this is quite common in insurance which does make it a little complicated !

      The calculation would be carried out in exactly the same way


  6. Hi,
    Can the EML be applied on a fidelity Guarantee insurance survey?
    if, yes how would it defined. i have seen that MPL’s and EML calculations are majorly used on material damage scenarios. Is it possible to assign an EML to a fraud/theft /embezzlement scenario and how would it be calculated?

  7. EML is calculated by estimating the extent of a fire damage during normal working conditions e.g. normal office hours. Yuo first must identify the top location(target risk). For example if we have a fire in one room of three equivalent buildings, the EML may be calculated as follows;
    The total insurance sum limit = 100%
    Loss per target building 100%/3 = 33.3%
    Basing on the enginers estimation, there will be a loss percentage say about 70% damage in the room. This estimation depends on contents in the room, their flamablity e.g. metal may not be damaged but fuel will all be lost, smoke damage etc.
    This is multiplied by loss per target building i.e. 0.7 x 33.3% = 23.3% which is our EML

    1. This post as created lots of feed back which is really great to see.

      To quickly summarise the various questions raised ;

      1) EML and PML are the same thing, Estimated Maximum Loss and Probable Maximum Loss – as is quite common in insurance they are different terms but mean exactly the same as detailed in the original post.

      2) An EML cannot be calculated with an exact formula for all situations – every risk is different and in some ways is open to the opinion of the person making the calculation although certain static considerations will always apply.

      3) An EML is normally calculated by a surveyor after he visits a premises and will be based on things like construction, security, location, fire fighting appliances present, proximity to a police or fire station.

      4) As you can see there are many factors to consider in arising at the final EML figure which is still at best as its names suggests ‘an estimate’

      5) EML’s are generally only used on Material Damage type risks where property is being insured

      Hope this helps

  8. We are new students to Risk Finance and we need to discuss these three measures critically – would anyone like to share some insight for us…
    1.Maximum foreseeable loss
    2.Estimated maximum loss
    3.Normal loss expectancy

    Andrew & Team

  9. We also have this question: Briefly discuss the principal forms of income which could accrue to a captive insurance company.

    We would greatly appreciate some help with this.

    Andrew & Team

  10. you have to know that “EML error” is an important matter which rooted in miscalculation of the target risk. we can consider this as an disadvange of EML

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