Casualty Actuarial Society (CAS) Practice Exam

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Question: 1 / 400

What is the assumption under which underwriters often calculate probable maximum loss (PML)?

All properties will remain safe

Natural disasters are unlikely

Anything that can go wrong will go wrong

The assumption that underwriters often rely upon when calculating the probable maximum loss (PML) is that anything that can go wrong will go wrong. This stems from a risk management perspective where underwriters consider the worst-case scenarios in order to gauge the maximum loss that could potentially occur under adverse conditions. By taking this into account, they are able to assess the risk exposure properly and set appropriate premiums or reserve funds.

The concept of PML is particularly critical as it requires underwriters to analyze various risks and their potential impacts, taking into consideration factors such as the characteristics of the insured properties, the location, and the types of hazards that may affect them. This approach reflects a comprehensive understanding of risks and their realistic implications, rather than adopting an overly optimistic view about the safekeeping of properties or the likelihood of natural disasters.

Casualty Actuarial Society (CAS) Practice Exam

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