VosePrincipleEV
See also: VosePrincipleEsscher, VosePrincipleRA, VosePrincipleStdev, Premium calculations
VosePrincipleEV(frequency distribution, severity distribution, theta)
Example modelThis function calculates the insurance premium for given frequency and severity distributions using the Expected value principle.
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Frequency distribution - a frequency distribution object.
-
Severity distribution - a severity distribution object.
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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.
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