Compound Probability

AAA

DEFINITION of 'Compound Probability'

A mathematical term relating to the likeliness of two independent events occurring. The compound probability is equal to the probability of the first event multiplied by the probability of the second event. Compound probabilities are used by insurance underwriters to assess risks and assign premiums to various insurance products.

INVESTOPEDIA EXPLAINS 'Compound Probability'

The most basic example of compound probability is flipping a coin twice. If the probability of getting heads is 50% (.50), then the chances of getting heads twice in a row would be (.50 X .50), or .25 (25%).


As it relates to insurance, underwriters may wish to know, for example, if both members of a married couple will reach the age of 75, given their independent probabilities. Or, the underwriter may want to know the odds that two major hurricanes hit a given geographical region within a certain time frame. The results of their math will determine how much to charge for insuring people or property.

RELATED TERMS
  1. Actuary

    A professional statistician working for an insurance company. ...
  2. Premium

    1. The total cost of an option. 2. The difference between the ...
  3. Casualty Insurance

    A broad category of coverage against loss of property, damage ...
  4. Conditional Probability

    Probability of an event or outcome based on the occurrence of ...
  5. Insurance Underwriter

    A financial professional that evaluates the risks of insuring ...
  6. Noncancellable Insurance Policy

    A life or disability insurance policy that an insurance company ...
Related Articles
  1. Find The Right Fit With Probability ...
    Fundamental Analysis

    Find The Right Fit With Probability ...

  2. Is Insurance Underwriting Right For ...
    Insurance

    Is Insurance Underwriting Right For ...

  3. Selecting The Right Mix Of Insurance ...
    Home & Auto

    Selecting The Right Mix Of Insurance ...

  4. Bet Smarter With The Monte Carlo Simulation
    Active Trading Fundamentals

    Bet Smarter With The Monte Carlo Simulation

Hot Definitions
  1. Conduit Issuer

    An organization, usually a government agency, that issues municipal securities to raise capital for revenue-generating projects ...
  2. Financing Entity

    The party in a financing arrangement that provides money, property, or another asset to an intermediate entity or financed ...
  3. Hyperinflation

    Extremely rapid or out of control inflation. There is no precise numerical definition to hyperinflation. Hyperinflation is ...
  4. Gross Rate Of Return

    The total rate of return on an investment before the deduction of any fees or expenses. The gross rate of return is quoted ...
  5. Debit Spread

    Two options with different market prices that an investor trades on the same underlying security. The higher priced option ...
  6. Leading Indicator

    A measurable economic factor that changes before the economy starts to follow a particular pattern or trend. Leading indicators ...
Trading Center