What is the primary purpose of insurance?

The primary purpose of insurance is to provide financial protection against potential losses. Insurance acts as a safety net, allowing individuals and businesses to mitigate the financial impact of unforeseen events such as accidents, natural disasters, or liability claims. By paying premiums, policyholders transfer the risk of significant financial loss to the insurer, which pools resources from many customers to pay for claims. This system ensures that when losses occur, affected individuals can recover financially, promoting stability and security in society.

Options focusing on profit generation or tracking claims history lack the broader protective intent central to insurance. While insurance companies do aim to operate profitably, profit generation is secondary to the fundamental objective of safeguarding against risks. Similarly, while tracking claims history is important for underwriting and managing policies, it does not represent the core purpose of insurance, which fundamentally revolves around providing that crucial financial safety and security. Governing risk management policies relates more to how businesses or organizations manage risks rather than the intrinsic function of insurance in providing financial protection.