VosePrincipleEV | Vose Software


See also: VosePrincipleEsscher, VosePrincipleRA, VosePrincipleStdev, Premium calculations

VosePrincipleEV(frequency distribution, severity distribution, theta)




Example model

This function calculates the insurance premium for given frequency and severity distributions using the Expected value principle.

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.