What is the primary purpose of insurance?

The primary purpose of insurance is to transfer risk. This concept is foundational to how insurance operates; it allows individuals or businesses to protect themselves from potential financial losses. By purchasing insurance, a policyholder pays a premium to an insurer, which in turn agrees to cover certain risks or losses that may occur in the future. This transfer of risk means that instead of bearing the full financial burden of an unexpected event—such as an accident, theft, or natural disaster—the insured can rely on the insurance company to provide financial support.

Other options, while they may represent effects or goals associated with insurance, do not capture its main purpose. Creating wealth is not a direct function of insurance, as its goal is risk management rather than investment. Avoiding loss can be a result of having insurance, but since losses can still occur (albeit with financial support), this option is misleading. Finally, minimizing costs is not the primary aim of insurance; in fact, insurance is often seen as an additional cost that must be managed while understanding its risk coverage benefits. Thus, focusing on risk transfer effectively encompasses the essential role that insurance serves in individuals' and businesses' financial planning and security.