Definition - What does Compound Probability mean?
Compound probability refers to a mathematical calculation that determines the possibility of two separate events happening at the same time. To calculate compound probability, multiply the possibility of the first even occurring with the probability of the second event occurring.
The insurance industry uses compound probability to analyze risks and determine premiums.
Insuranceopedia explains Compound Probability
To use a simple example, suppose we knew someone who went for a morning jog 50% of the time and who also drove their car on average every other day. If we wanted to calculate the compound probability of them doing both activities on the same day, we would multiply both percentages, as follows:
0.5 x 0.5 = 0.25
This means there is a 25% chance that this person would both go for a jog and drive their car on a given day.