What is the primary purpose of insurance?

The primary purpose of insurance is to provide financial protection against potential future losses. This means that when individuals or businesses face uncertainties that could lead to financial hardship—such as accidents, illnesses, natural disasters, or liability claims—insurance helps to mitigate those potential impacts by offering compensation for covered losses. By paying a premium, policyholders transfer the risk of significant financial burden to the insurer, which in turn pools the risks of many customers and uses the funds to cover claims as they arise.

Insurance does not aim to eliminate risks entirely, as it is impossible to eliminate all potential liabilities and uncertainties. Instead, it allows individuals and businesses to manage those risks more effectively, ensuring that a financial setback doesn't lead to insolvency or significant hardship. While investing policyholder funds or simplifying transactions may be beneficial aspects of the insurance business, they are secondary to the essential function of protecting against financial loss.