What is the purpose of insurance based on the concept of risk spreading?

The purpose of insurance based on the concept of risk spreading is to reduce financial losses over a large group. When individuals or entities purchase insurance, they pay premiums into a common pool. This pool is then used to cover the losses of those who may experience a covered event, such as property damage, liability, or health issues.

By distributing the financial burden of risk among many people, insurance allows individuals to share the costs associated with unforeseen events. For example, not everyone will face a loss at the same time, so pooling resources helps ensure that those who do incur losses can receive compensation without suffering significant financial hardship. This collective approach promotes stability and security, as the financial impact of risks is lessened for each member of the insured group, transforming potentially devastating personal losses into manageable costs.

The other choices do not align with the fundamental principles of insurance related to risk spreading. Increasing financial gains is not the primary goal of insurance, as it primarily focuses on risk management rather than profit generation. Eliminating all risks is unrealistic, as risk can never be completely eliminated; insurance merely manages and mitigates risk. Predicting future financial trends is not a function of insurance as it pertains to protecting against specific losses rather than forecasting financial performance.