What is the primary purpose of insurance?

The primary purpose of insurance is to provide financial protection against losses. Insurance serves as a safety net, allowing individuals and organizations to mitigate the financial impact of unforeseen events, such as accidents, natural disasters, health issues, or other liabilities. When a policyholder experiences a loss that is covered by their insurance policy, the insurance company compensates them, thus alleviating the burden of those costs and promoting financial stability.

This core function of insurance underpins other aspects of the business, such as collecting premiums and managing risks. While collecting premiums is necessary for the operation of insurance companies, it fundamentally serves to fund the compensation for losses rather than being an end goal. Similarly, managing risks for businesses is a part of the broader objective of insurance but does not capture its primary purpose, which is specifically about providing financial protection to policyholders. Promoting financial investments, on the other hand, is typically unrelated to the purpose of insurance, as insurance is primarily focused on protection rather than growth or returns on investment.