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Probable Maximum Loss

Understand and minimize your exposure to seismic risk with the help of Partner's seismic and structural team.

Understand and minimize your exposure to seismic risk with the help of Partner's engineering and seismic team.

Probable Maximum Loss estimates and Seismic Risks Assessments are used by property owners, tenants, investors, lenders and others to understand and control related risks. In addition to death and injury, earthquakes can result in damage to buildings, loss of inventory, disruption of operations and cash flow, interruption of utility and public services, and more. 

Because not all clients view risks in the same way, the evaluation of earthquake risks takes different forms for different clients. Those concerned about business interruption and continuous operation of facilities, have invested a significant portion of their net worth in a single property, or manage investments for others, for example, may require more detailed studies than others who are interested in screening a portfolio of properties for significant potential losses. 

Preliminary Screening Tools

Screening criteria are frequently used to decide when an assessment is needed. For the most part, assessment is conducted in areas that have greater potential for damaging earthquakes. In the U.S, two screening tools are normally used:

  • Seismic Zones

Many clients require the completion of earthquake loss estimates in seismic zones 3 and 4, as defined by the Seismic Zone Map included as an appendix to the ASTM E2557 scope of work for Probable Maximum Loss assessments. The map is was first published as part of the Uniform Building Code in the 1990s. The map was discontinued as part of the building code more than 15 years ago, but is included in this standard for use in determining when an evaluation of Probable Maximum Loss may be appropriate. 

  • Peak Ground Acceleration

Peak ground acceleration (PGA) is a more modern screening tool. Estimates of site-specific peak ground acceleration are readily available on the United States Geologic Survey (USGS) web site. Lenders like Fannie Mae and Freddie Mac require Probable Maximum Loss for properties with peak ground acceleration of more than 0.15g based on a 10% probability of exceedance in 50 years, but other thresholds may be appropriate depending on your appetite for risk. 

Scopes of Work

Seismic Risk Assessment
Seismic Risk Assessment is sometimes referred to as an assessment of Probable Maximum Loss, though the terms are not entirely interchangeable. There is no single accepted definition of the term Probable Maximum Loss. Generally users of PMLs are concerned with damage to structures which may result in financial losses. Though even a small earthquake can result in injury, some clients also use the PML as an indicator of increased potential for injury and loss of life. 

The ASTM E2026-16a Standard Guide for Seismic Risk Assessment of Buildings, published by ASTM International, defines common terminology used in assessments, and identifies levels of assessment which allows clients and consultants to effectively communicate objectives and scopes of work. The Guide describes at least three to four levels of assessment for the evaluation of:
•    Seismic Ground Motion
•    Site Stability
•    Building Stability
•    Building Damageability
•    Building Content Damageability, and 
•    Business Interruption   

Level 0 assessments are typically used to screen for specific risks, whiles Level 1, Level 2 and Level 3 assessments provide increasingly detailed review, study and design evaluation. As a Guide, E2026 provides a discussion of approaches to seismic risk assessment, but does not identify or recommend a specific procedure for the work. The ASTM E2557 practice for Probable Maximum Loss/Seismic Risk Assessments incorporates elements of E2026 to describe a more specific process for the evaluation of the earthquake damageability. When ordering a Probable Maximum Loss or Seismic Risk Assessment, user should select a level of assessment that satisfies their unique objectives and risk tolerance.  

Probable Maximum Loss Assessment
Probable Maximum Loss assessments provide a statistical estimate of building damage based on user-defined risk tolerances. The assessment can be incorporated into more complex assessment of seismic risks, or can be used to screen for properties at increased risk of significant seismic damage. Most PML assessments are performed in accordance with ASTM E2557 Standard Practice for Probable Maximum Loss (PML) Evaluations for Earthquake Due Diligence Assessments based on Level 0 or Level 1 criteria as discussed in ASTM E2026. 

No single definition of PML is identified in E2026 or E2557; however, the use of SELDBE (Scenario Expected Loss, SEL assuming the Design Basis Earthquake, DBE) is commonly used by lenders and to evaluate properties for inclusion in Commercial Mortgage Backed Securities (CMBS) pools. The SELDBE is the median damage predicted based on ground shaking with a 10% chance of exceedance in 50 years, also referred to as the 475-year return period. PML can also be expressed as Scenario Upper Loss (SUL) or Probable Loss, and can be calculated for 200-year return periods, Maximum Capable Earthquakes, or to conform to other confidence levels.  
The PML is a statistical study intended to suggest how the property will be affected by ground shaking, and cannot guarantee the maximum ground shaking or performance of the property in a seismic event. As a result, it is important for you to select a level of assessment that satisfies your unique objectives and risk tolerance.

Three levels of assessment are commonly performed:

  • Modified Level 1

ASTM E2026 defines the requirements of Level 0 and Level 1 reports, but most clients customize these in some way. They may be reluctant to fund an engineering assessment, but hope to achieve a higher degree of confidence than is provided by a Level 0 assessment, or they may be interested mandatory retrofit requirements, or other risks not addressed by the ASTM standards. By customizing scopes of work, Partner helps clients satisfy due diligence needs while minimizing costs.   

  • Preliminary Engineering Assessment/Level 1

Level 1 assessments involve a preliminary engineering assessment of buildings. Information concerning the existing building can be developed by review of plans, or visit to the property. A preliminary review of the building design is performed consistent with engineering design criteria, though the verification of design is limited. When geotechnical information is available, site-specific geology may be considered in evaluating the performance of the building.  

  • Screening/Level 0 

Level 0 assessments involve the review of property information and published seismic data to estimate ground shaking and estimation of building performance considering building characteristics: sometimes derived from information provided by others, and sometimes resulting from direct observation. Common design deficiencies are considered in assessing the property. 

  • Damageability Assessment

Sometimes an estimate of damage is not adequate to understand your risks. A more detailed damageability assessment can provide insight into business interruption, damage to inventory and building contents, fire or flood damage caused by earthquakes, and the ability to continue operations immediately following an earthquake. Additional evaluation of these risks can be performed at various levels to help you sleep soundly through the night. 

 

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