Question

An insurance company estimates that it should make an annual profit of $150 on each homeowners policy written, with a standard deviation of $6000. a) Why is the standard deviation so large

Answer 1

The standard deviation is so large because of the nature of the insurance business. In the vast majority of cases, the insurance company will have the profit of $150, that we can assume, is the price of the policy. However, in a few cases, the company will have losses that are very large, perhaps because of a house burning, or burglary, and those few large losses is what makes the standard deviation be so high.