What is insurance primarily designed to provide?

Insurance is primarily designed to provide a means of transferring risk. This concept is central to the functioning of insurance as a financial service. When individuals or businesses purchase insurance, they are essentially transferring their potential financial losses from unforeseen events to the insurance company. In this way, insurance helps to manage and mitigate the impact of risks, allowing policyholders to gain peace of mind knowing that they have a safety net in place should a loss occur.

By pooling the risks of many individuals, insurance companies can spread the financial burden of claims while providing compensation to those who face losses. This risk transfer mechanism is fundamental to the operation of insurance products, enabling coverage for various perils such as property damage, liability, and health-related expenses.

Other options, while related to aspects of insurance, do not capture its primary purpose. For instance, investment arrangements and increasing liabilities do not reflect the protective nature of insurance. Similarly, while a legal agreement is a component of the insurance contract, it is a conduit for the real function of risk transfer and does not encompass the overall intention of insurance.