Experimental Probability
What Does Experimental Probability Mean?
Experimental probability is a statistical method used to determine the frequency of an event based on actual data obtained from experiments. Actuaries utilize this method to calculate premiums and assess risks for insurance companies. It is also referred to as empirical probability. This is one of the methods behind how business insurance premiums are calculated, where past claim frequencies feed into the rates a company pays.
Insuranceopedia Explains Experimental Probability
Experimental probability is expressed as a ratio of the number of times an event has occurred to the total number of experiments performed. This method becomes increasingly accurate as more experiments are conducted, leading to larger and more informative data sets.
Insurers use this method to predict the likelihood of claims being filed, enabling them to make informed decisions about premium rates. This is also how insurers weigh the factors that affect the cost of life insurance, since each applicant is priced against observed claim rates for similar profiles.
