VosePrincipleStdev | Vose Software


See also: VosePrincipleEsscher, VosePrincipleEV, VosePrincipleRA, Premium calculations

VosePrincipleStdev(frequency distribution, severity distribution, alpha)



Example model

This function calculates the insurance premium for given frequency and severity distributions using the Standard Deviation 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 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.