Compound Probability

What Does Compound Probability Mean?

Compound probability refers to a mathematical calculation that determines the likelihood of two or more separate events happening simultaneously or consecutively. To calculate compound probability, multiply the probability of the first event by the probability of the second event.

The insurance industry uses compound probability to assess risks and set premiums accordingly.

Insuranceopedia Explains Compound Probability

For a simple example, suppose we know someone who goes for a morning jog 50% of the time and drives their car every other day, on average. To calculate the compound probability of them doing both activities on the same day, we would multiply the probabilities as follows:

0.5 × 0.5 = 0.25

This means there is a 25% chance that this person will both go for a jog and drive their car on any given day.