VosePrincipleRA | Vose Software


See also: VosePrincipleEsscher, VosePrincipleEV, VosePrincipleStdev, Premium calculations

VosePrincipleRA(frequency distribution object, severity distribution object, rho)



Example model

This function calculates the insurance premium for given frequency and severity distributions using the Risk Adjusted 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 Risk Adjusted principle is a special case of the Proportional Hazards Premium Principle based on coherent risk measures (see, e.g. Wang (1996). The survival function (1-F(x)) of the aggregate distribution which lies on [0,1] is transformed into another variable that also lies on [0,1]

Premium =               r > 1

where F(x) is the cumulative distribution function from the aggregate distribution.