Simple Probability

Definition - What does Simple Probability mean?

Simple probability refers to the calculation of an outcome or the chance of an event ever happening. The concept is used in the actuarial departments of insurance companies to predict the risks to be covered among the insured in a given period.

Insuranceopedia explains Simple Probability

A simple probability is calculated by dividing a specific outcome by all the possible outcomes. For instance, if you have 12 bottles of chocolate milk in an ice box containing 15 bottled drinks and you want to know your odds that the bottle you pick randomly will contain chocolate milk, then you divide the number of chocolate milk bottles (12) by the total number of bottled drinks (15). The result is 0.8, which means that there is an 80% chance that a randomly selected bottle will contain chocolate milk.

Insurers, of course, don't do calculations about chocolate milk, but they use the same basic formula to determine how much they are likely to pay out to sets of policyholders who have the same policy. This result gives them an idea of how much money they need to raise and earmark for coverage.

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