What is the primary purpose of insurance?

The primary purpose of insurance is to substitute small certain losses for larger uncertain losses. This concept revolves around the idea that individuals or businesses face unpredictable and potentially significant financial setbacks, such as property damage, liability claims, or health issues. Insurance helps to mitigate these uncertainties by allowing individuals to pay smaller, manageable premiums in exchange for coverage against the possibility of larger financial losses.

By pooling risk among many policyholders, insurance companies can spread out the financial burden associated with significant losses, thereby providing peace of mind to those insured. This risk transfer is foundational to how insurance operates and protects against the unpredictable nature of life's events.

The other options, while related to aspects of insurance, do not capture its primary purpose as accurately. For example, insurance cannot prevent losses entirely, nor does it specifically aim to manage investment risks or solely provide liability protection. Instead, these elements may be components of various insurance products but are not the central reason for obtaining insurance in the first place.