What is the main purpose of insurance?

The main purpose of insurance is to facilitate the transferring of risk. When individuals or businesses purchase insurance, they are essentially transferring the financial responsibility of potential losses to the insurance company. This means that instead of bearing the full burden of costs associated with unforeseen events—such as accidents, illnesses, or property damage—the policyholder pays a premium to the insurer. In exchange, the insurer agrees to cover specific financial losses as stipulated in the insurance contract.

This risk transfer allows individuals and businesses to protect themselves against financial uncertainty and provides peace of mind, knowing that they have support in handling losses that may occur. This foundational concept of risk transfer underscores the entire insurance industry, as it enables a collective sharing of risk among many policyholders, which ultimately stabilizes costs and ensures financial support when needed.

Other options like avoiding losses, generating profit, or investing assets reflect secondary objectives or activities associated with the insurance industry but do not capture the fundamental role of insurance itself, which is primarily about managing risk through transfer rather than avoidance or profit generation.