Insurance Broker Certification Practice Exam

In the context of risk management, what is insurance primarily used for?

1. To increase assets

2. To transfer risk of loss

3. To avoid all financial loss

4. To create profits for shareholders

The correct answer is: To transfer risk of loss

Insurance is primarily used for transferring the risk of loss from one party to another. When individuals or organizations purchase insurance, they effectively share the financial burden of potential losses with the insurance company. This transfer of risk allows the insured party to mitigate the potential financial impact of unexpected events, such as accidents, natural disasters, or health issues. Insurance does not eliminate risk or avoid all financial loss; instead, it provides a safety net that helps to manage risk by allowing policyholders to recover some or all of their losses if a covered event occurs. This mechanism is fundamental to the concept of insurance as a risk management tool, which distinguishes it from other financial practices aimed at increasing assets or generating profits.