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.

Actuary
A professional statistician working for an insurance company. ... 
Insurance Underwriter
A financial professional that evaluates the risks of insuring ... 
Conditional Probability
Probability of an event or outcome based on the occurrence of ... 
Premium
1. The total cost of an option. 2. The difference between the ... 
Casualty Insurance
A broad category of coverage against loss of property, damage ... 
Equivalent Flat Rate
The rate at which a flat rate insurance guarantee scheme and ...

What financial ratios are most useful for an investor to evaluate the liquidity of ...
An insurance company, like any other nonfinancial company, needs access to liquidity in case it needs to fulfill its debt ... Read Full Answer >> 
What is a "linear" exposure in Value at Risk (VaR) calculation?
A linear exposure in the valueatrisk, or VaR, calculation is represented by positions in stocks, bonds, commodities or ... Read Full Answer >> 
What is the criteria for a simple random sample?
Simple random sampling is the most basic form of sampling and can be a component of more precise, more complex sampling methods. ... Read Full Answer >> 
What are some examples of ways that sensitivity analysis can be used?
Sensitivity analysis is an analysis method that is used to identify how much variations in the input values for a given variable ... Read Full Answer >> 
How is the 8020 rule (Pareto's Principle) used in macroeconomics?
The 8020 rule was first used in macroeconomics to describe the distribution of wealth in Italy in the early 20th century, ... Read Full Answer >> 
What are some of the uses of the coefficient of variation (COV)?
In statistics, the coefficient of variation (COV) is a simple measure of relative event dispersion. It is equal to the ratio ... Read Full Answer >>

Fundamental Analysis
Find The Right Fit With Probability Distributions
Discover a few of the most popular probability distributions and how to calculate them. 
Insurance
Is Insurance Underwriting Right For You?
If you have excellent analytical skills and an eye for detail, this may be your calling. 
Home & Auto
Selecting The Right Mix Of Insurance Benefits
Choosing employee benefits involves weighing the probability you will need them against taxes and cost. 
Active Trading Fundamentals
Bet Smarter With The Monte Carlo Simulation
This technique can reduce uncertainty in estimating future outcomes. 
Investing
The Strong Dollar’s (Real) Toll On Tech Stocks
A large portion of U.S. technology companies’ sales occur overseas, given the strong international business and consumer demand from many U.S. tech firms. 
Fundamental Analysis
How to Calculate a Coverage Ratio
In broad terms, the higher the coverage ratio, the better the ability of the enterprise to fulfill its obligations to its lenders. 
Fundamental Analysis
Calculating the HerfindahlHirschman Index (HHI)
The HerfindhalHirschman Index, (HHI) is a measure of market concentration and competition among market participants. 
Fundamental Analysis
Calculating Net Interest Margin
Net interest margin is a metric used to measure the effectiveness of a company’s investment decisions, particularly financial institutions. 
Professionals
An Advisor's Guide to Prof. Liability Insurance
A guide to what financial advisors need to know about professional liability insurance. 
Insurance
India's TwoChild Policy
As of 2014, 11 Indian states have passed laws to restrict Indian citizens from having no more than two children.