What is the fundamental purpose of insurance?

The fundamental purpose of insurance is to provide financial protection against loss. Insurance is a mechanism that helps individuals and businesses manage risk by transferring the potential financial consequences of unexpected events, such as accidents, illnesses, or natural disasters, to an insurance provider. When a policyholder purchases insurance, they are essentially paying a premium to secure coverage against specific risks. This allows them to mitigate the financial impact of losses, as the insurance company will compensate them according to the terms of the policy in the event of a covered loss.

The other options do not align with the core purpose of insurance. Investing capital for growth pertains more to investment objectives rather than risk management. Encouraging risky behavior contradicts the essence of risk management, which seeks to alleviate the impact of risks rather than promote them. Promoting tax benefits can be a secondary advantage of certain types of insurance policies but is not the primary reason why insurance exists. The foundational role of insurance remains rooted in providing financial security and stability to individuals and organizations facing unpredictable risks.