What is the major function of insurance?

The major function of insurance is to spread the losses of the few among the many. This concept is foundational to how insurance operates. By pooling risk among a large group of individuals, insurance allows the financial burden of significant losses to be shared across all policyholders. Each person pays a relatively small premium, and in return, they gain protection against the risk of larger, more devastating financial losses.

This mutual sharing of risk is what makes insurance possible. For instance, if one policyholder experiences a significant loss, the claims generated from that individual are funded by the collective contributions from many others who have also taken out insurance. This effectively distributes the risk, making it more manageable for individuals and giving them greater security and peace of mind.

Understanding this principle is crucial for comprehending how insurance functions as a risk management tool in personal finance and in the broader economy. This is distinct from the other choices, which either imply immediate or guaranteed outcomes that insurance does not typically provide, or focus on aspects like asset management that are not central to the primary role of insurance.