Page 31 - Insurance Times April 2023

Basic Elements of

law of probability

or law of large

numbers

R. Venkatesan
BA BGL AII DIL
insurance

It is the calculation of an outcome or the chance of an event ever happening. Insurance companies
use probability statistics to determine the chances of having to pay out a claim. A simple probability
is calculated by dividing a specific outcome by all the possible outcomes.

Probability (means): In probability theory, the law (or formula) of total probability
is a fundamental rule relating marginal probabilities to
Random House a strong likelihood or chance of something.
conditional probabilities. It expresses the total probability of
The relative possibility an event will occur (the ratio of the
an outcome which can be realised via several distinct events.
number of actual occurrences to the total number of possible
occurrences).
Kinds of probabilities:
A numerical measure of the chance or likelihood that a Simple Probability:
particular event will occur. Probabilities are generally The ratio of the number of outcomes favourable for the
assigned on a scale from 0 to 1. A probability near 0 indicates event to the total number of possible outcomes is termed
an outcome that is unlikely to occur, while a probability near as probability. In other words, a measure of the likelihood
1 indicates an outcome that is almost certain to occur. of an event (or measure of chance) is called probability.
It is the calculation of an outcome or the chance of an
The probability of an event occurring is the chance or likelihood
event ever happening. Insurance companies use
of it occurring. The probability of an event A, written P (A),
probability statistics to determine the chances of having
can be between zero and one, with P(A) = 1 indicating that to pay out a claim. A simple probability is calculated by
the event will certainly happen and with P(A) = 0 indicating
dividing a specific outcome by all the possible outcomes.
that event A will certainly not happen.
The probability of an event, like rolling an even number,
Probability: (in other terms) is the number of outcomes that constitute the event
the number of successful outcomes of an experiment divided by the total number of possible outcomes. We
call the outcomes in an event its "favourable outcomes".
the number of possible outcomes
For instance, when flipping a coin, there are two outcomes:
If a coin were tossed, the probability of obtaining a head = ½, heads or tails. To find the probability of getting either heads
since there are 2 possible outcomes (heads or tails) and 1 of or tails, divide one outcome (1) by the two possible outcomes
these is the 'successful' outcome. (2). Dividing 1 by 2 results in .50 or 50%.

The Insurance Times April 2023 27