Let N denote the number of hurricanes, which is Poisson distributed with mean and variance 4.
Let
i
X
denote the loss due to the i
th
hurricane, which is exponentially distributed with mean
1,000 and therefore variance (1,000)
2
= 1,000,000.
Let
X
denote the total loss due to the N hurricanes.
This problem can be solved using the conditional variance formula. Note that independence is
used to write the variance of a sum as the sum of the variances.