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Download a pdf copy of this help file here |
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Download a pdf copy of this help file here |
See also: VosePrincipleEsscher, VosePrincipleEV, VosePrincipleRA, Premium calculations
VosePrincipleStdev(frequency distribution,
severity distribution, alpha)
This function calculates the insurance premium for given frequency and severity distributions using the Standard Deviation principle.
Frequency distribution - a frequency distribution object.
Severity distribution - a severity distribution object.
alpha - 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 Standard deviation principle calculates the premium in excess of E[X] as some multiple a of the standard deviation of X:
Premium
= 
a
> 0
The problem with this principle
is that, at an individual level, there is no consistency in the level
of risk the insurer is taking for the expected profit 
since
s
has no consistent probabilistic interpretation.
Example model