What is the primary function of insurance?

The primary function of insurance is to transfer risk from one individual to a group. This process involves individuals pooling their resources to protect each other against potential financial losses that could occur due to unexpected events, such as accidents, illnesses, or natural disasters. When an individual purchases insurance, they are effectively sharing their risk with a larger group, making it more affordable for everyone involved. Insurers collect premiums from policyholders, which are then used to pay for covered losses, allowing the group to manage financial risks more effectively.

This principle of risk transfer is fundamental to the concept of insurance, as it helps to mitigate the financial impact of unforeseen events on individuals. By spreading the risk over a large number of people, insurance not only provides financial protection to policyholders but also promotes a sense of security and stability within the community. Other choices, such as investing in stock markets or ensuring profitability for insurance companies, are secondary functions that might arise as a result of risk management, rather than the core purpose of insurance itself. Similarly, while saving for future liabilities is an important aspect of financial planning, it does not encompass the primary function of insurance, which is centered around risk transfer.