 |
Download a pdf copy of this help file here |
|
Download a pdf copy of this help file here |
See also: VosePrincipleEsscher, VosePrincipleRA, VosePrincipleStdev, Premium calculations
VosePrincipleEV(frequency
distribution, severity distribution, theta)
This function calculates the insurance premium for given frequency and severity distributions using the Expected value principle.
Frequency distribution - a frequency distribution object.
Severity distribution - a severity distribution object.
theta - see the formula below.
For an insurance policy the premium charged must be at least greater than the expected payout E[X]. Otherwise, according to the law of large numbers, in the long run the insurer will be ruined. The question is then: how much more should the premium be over the expected value?
The Expected Value principle calculates the premium in excess of E[X] as some fraction q of E[X]:
Premium
= 
q
> 0
Ignoring administration costs q represents the return the insurer is getting over the expected capital required E[X] to cover the risk.
Example model