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Probability Analysis

Probability Analysis

Definition

Probability Analysis — a technique used by risk managers for forecasting future events, such as accidental and business losses. This process involves a review of historical loss data to calculate a probability distribution that can be used to predict future losses. The probability analyst views past losses as a range of outcomes of what might be expected for the future and assumes that the environment will remain fairly stable. This technique is particularly effective for companies that have a large amount of data on past losses and that have experienced stable operations. This type of analysis is contrasted to trend analysis.

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