Estimating Probable Maximum Loss with Order Statistics [Discussion]

With the increased importance of utilizing quantitative analysis in risk management decision-making, Miss Wilkinson’s paper should provide our profession with a valuable use of the concept of probable maximum loss (PML), a term that has been a fixture of the insurance vernacular for decades. Previously, underwriters have used the PML, or other related tools, to establish the range for the “working layer of coverage.” While it was always acknowledged that a larger loss was possible, the PML estimated the expected maximum loss potential for the risk, with the exposure beyond the PML being treated as a catastrophe. Today, the dramatic increase in the amount of risk retained by insureds has made the pricing of large accounts more complex, since the “buffer” of the working layer is no longer available. It is at these extreme values that the author’s work with order statistics may provide a variety of applications.