Per Statcast, arm strength is measured by average baseball velocity of a player’s fastest throws. The specifics vary by position.
The following two quotes are from Baseball Savant.
Definition of arm velocity. “Statcast position player arm strength metrics are available beginning with the 2020 season. Given that there is no rulebook definition of “a throw where the player is trying hard,” and many non-competitive lobs are captured, we have elected to take the average of the top portion of a player’s throws. Since the demands of each position grouping are different, the averages and qualifiers are different as well.