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of the portfolio. Too low retentions suggests
under utilisation of funds.

Q. Write a critical note on PML basis of the
underwriting.

Ans: The PML concept is based on the principle that the
probability of occurrence of a fire and its intensity are
not the same in different types of risks. In PML basis,
the underwriting of risks is based on their loss potential
rather than on the sums insured.

For example, in a large risk of sum insured Rs. 100
Crores, several plants spread over a large area, the
insurer may determine the maximum loss potential at
say, Rs.25 Crore (PML). When reinsurance is done
on this basis the ceding company will be able to retain
more than that on the arrangement on sum insured
basis.

PML basis also helps the insurers with greater capacity
to handle large risks. However, the following
disadvantages on PML basis should be borne in mind:

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