What is the primary purpose of insurance?

The primary purpose of insurance is to transfer risk from individuals to companies. This means that when individuals purchase insurance, they are effectively shifting the financial burden of potential losses (such as from accidents, illnesses, or property damage) to the insurance company. This is a fundamental principle of insurance; by pooling resources from many policyholders, insurers can provide coverage and support to those who experience losses, thereby creating a safety net for individuals and businesses.

In this setup, the insurance company takes on the risk associated with adverse events, allowing policyholders to have peace of mind knowing they have financial protection in case something unfortunate occurs. This risk transfer mechanism highlights the key role insurance plays in personal and economic stability.