What is the primary function of an insurance policy?

The primary function of an insurance policy is to provide financial protection against unforeseen events. Insurance is fundamentally designed to mitigate risk by offering compensation or reimbursement for losses incurred due to events that are unexpected and beyond the control of the insured, such as accidents, illnesses, property damage, or liability claims. This financial safety net helps individuals and businesses effectively manage risks and ensures that they can recover from potential financial setbacks caused by these unforeseen circumstances.

While tracking policyholder information is important for administrative purposes, it does not capture the core purpose of insurance. The same applies to increasing investment returns or offering rebates on premiums, which, although sometimes included as features of certain policies or programs, do not define what an insurance policy fundamentally aims to accomplish in its role as a risk management tool.