Engineers perform Probable Maximum Loss Reports (or Seismic Damageability Reports) for real estate investors, lenders, and insurance companies. The consumers of Probable Maximum Loss Reports have many different needs and there is considerable variance in methodology between providers-sometimes for client driven reasons and sometimes because of the engineer.
ASTM E2026 Standard Guide for Estimation of Building Damageability in Earthquakes , is a standard that tries to meet the needs of all stakeholders. The result is that the standard is often not very prescriptive. The very flexible ASTM for PMLs allows for a plethora of different types of PML Reports and is silent on the issue of the formula for calculating the PML.
The most significant element of the ASTM E2026 Standard is a defined set of vocabulary. Significant elements are as follows:
First, the term Probable Maximum Loss is defined as “a term used historically to characterize building damageability in earthquakes. It has had a number of significantly different explicit and implicit definitions. It is recommended that the term not be used in the future, and that the terms probable loss (PL) and scenario loss (SL), whose definitions are precise, be used to characterize the earthquake damageability of buildings and groups of buildings.”
Second, instead of simply stating the “Probable Maximum Loss Number” for a report, the ASTM Standard recommends providing multiple numbers. An engineer’s prediction is really not a single number (or damage ration); rather, we develop a curve of probabilities. Providing lenders a probability curve does not really work for the financial industry. Instead we have historically expressed to lenders a number associated with a given scenario. The ASTM E2026 Standard defines two important numbers on the curve:
Scenario Expected Loss (SEL)- the expected value loss in the specified ground motion of the scenario selected. Since the damage probability distribution usually is skewed, rather than symmetrical, it should not be inferred that the probability of exceeding the SEL is 50%; it can be higher or lower than this amount.
Scenario Upper Loss (SUL)-the scenario loss that has a 10% percent probability of exceedance due to the specified ground motion of the scenario considered.
The ASTM E2026 Standard also provides different levels of investigation. The four levels of inspection defined are:
Level 0 PML – Screening Level of Assessment
Level 1 PML – Drawing review and Site Visit
Level 2 PML – Structural Calculations
Level 3 PML – Full Engineering Review
The ASTM E2026 Standard goes a long way to improving the consistency of the practice of Probable Maximum Loss Reports (a.k.a. Seismic Damageability Assessments), but the ASTM’s committee need to accommodate all stakeholders produced, in my opinion, an overly flexible standard. I recommend that a lender seeking to use the PML product as a consistent underwriting tool should also consider applying the following four recommendations:
- 1) Use Theil Zsutty as a method of calculation for the PML;
- 2) Show the math on the calculations;
- 3) Work should be done under the responsible charge of a registered engineer;
- 4) Follow ASTM E2026-2007 and ASTM E2557-2007;
- 5) Do a Level 1 Inspection-in other words, require a site visit.