What is the primary purpose of transferring risks to an insurance company?

Transferring risks to an insurance company primarily serves to mitigate risks that individuals cannot afford. This approach allows individuals and businesses to protect themselves from potentially devastating financial consequences associated with unforeseen events, such as accidents, natural disasters, or liability claims.

By purchasing insurance, policyholders pay a relatively small premium to cover the risk of larger, unpredictable losses. The insurance company pools the premiums from many policyholders to create a fund that can be used to pay out claims as they arise. This risk-sharing mechanism enables individuals to manage their financial exposure effectively, making it possible to face risks that would otherwise be financially unmanageable.

In contrast, eliminating all financial risks is not feasible in reality, nor does insurance ensure profits for the insured; rather, it provides protection against significant losses. Duplicating existing financial resources does not align with the purpose of insurance, which is to provide financial safety nets rather than create redundancy. Thus, mitigating risks that individuals cannot afford aligns perfectly with the fundamental principle of risk management through insurance.