# How Is Probability Applied to Insurance?

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Rates differ for policyholders contracting identical insurance policies depending on several analyzable rating factors. Insurance providers have good reasons for this practice. As part of the analytical procedures, insurers study statistics to calculate and manage risk when evaluating policy applications and setting premium rates. The results show that, based on probability, some individuals simply pose a higher risk and are more likely to file claims.

## Probability Theory and Statistics

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Probability theory, a branch of mathematics, is a means of predicting random events by analyzing large quantities of previous similar events. Probabilities in statistics are the mathematical odds that an event will occur. To obtain a probability ratio, the number of favorable results in a set is divided by the total number of possible results in the set. The probability ratio expresses the likelihood that the event will take place. This ratio is significant to insurance providers.

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## Health Insurance

Insurance underwriters use probability theory when evaluating policy applications. For example, policyholders who smoke tobacco are at a higher risk for developing serious health problems. Statistics show that this often results in increased health insurance claims. The applicant's age and geographic location also allow the underwriter to predict future claims based on probability.

## Life Insurance and Annuities

Analyzing mortality rates, the insurer considers where the policyholder lives and what socioeconomic factors apply to the policyholder's current age and health. This analysis helps the insurer determine rates and options for life insurance policies and annuities using probability theory to predict the number of years a policyholder will live.