title: Probability In Real Life

 

2000 (UK)
Motor cars

Number of claims

3.4million

Numbers of cars on the road

28.4million

Probability of making a claim

3.4million/28.4million

 

0.12 (12%)

(Data source: Association of British Insurers)

 

Information from actual observations can be used to predict the probability of something happening in the future.Motor insurance companies need to understand how likely it is that a customer will make a claim. This is usually after they have been in an accident or had their vehicle stolen. They look at historical data to try and predict future claims. The insurance premiums are then charged according to these predictions. Here is a simple example of how this can be done.

Using information from previous years, the insurance companies can see the probability of a Car owner making a claim for the current year. From this information, for every 100 car drivers that a company insures, 12 of them are likely to make a claim.

In the year 2000, the average cost of each claim was £1,320. How much would you charge each customer in order to cover the likely cost of the claims?

Results from just one year won't be very accurate and insurers look at trends in the figures over many years. Click here to see how theory and experimental data can be different.

 

Risk assessment

These figures are averages for the United Kingdom. Real life is more complicated and other factors such as the age of the driver, their experience and the part of the country they live in will all be taken in to account by insurers. However, the basic principle of using historical data to predict the future is one that is used in many forms of risk assessment.