In summary, an insurance contract covers a policyholder for economic loss caused by a peril
named in the policy. The policyholder pays a known premium to have the insurer guarantee
payment for the unknown loss. In this manner, the policyholder transfers the economic risk to the
insurance company. Risk, as discussed in Section I, is the variation in potential economic
outcomes. It is measured by the variation between possible outcomes and the expected outcome:
the greater the standard deviation, the greater the risk.