Understanding Maximum Probable Loss (MPL) in Commercial Insurance

What is Maximum Probable Loss (MPL)?

Maximum Probable Loss(MPL) is the maximum loss that an insurer would be expected to incur on a policy; it is most often associated with insurance policies on property, such as fire insurance, and it represents the worst-case scenario for an insurer. Commercial insurance underwriters use probable maximum loss calculations to estimate the highest maximum claim that a business most likely will file, versus what itcould file, for damages resulting from a catastrophic event. Although underwriters use complex statistical formulas and frequency distribution charts, the concepts involved are not difficult to understand. In fact, once you understand the basic formula, you can estimate your own PML and use this information as a starting point in negotiating favorable commercial insurance rates.Calculate the dollar value of business property to establish the amount you stand to lose if a catastrophic event demolished your business. If you already have business property insurance, this is the amount of insurance coverage. Otherwise, add real property and business personal property to reach the valuation.Identify risk factors that increase the chance a specific catastrophic event would demolish your business. For example, risks associated with a fire include combustible construction materials, clutter, flammable liquids or other substances used to operate or maintain your business, and distance to the nearest fire station.Risks associated with flooding include the business site, such as whether you are in a documented flood plain, construction materials and storage policies.Identify risk mitigation factors that decrease the chance a specific catastrophic event would demolish your business. For example, risk mitigation factors associated with a fire include functioning protection systems such as alarms, automatic sprinklers and portable fire extinguishers. Also, consider elements in your emergency action plan that address emergency reporting procedures and policies for protecting business assets