What is the relationship between risk and insurance?

The relationship between risk and insurance is fundamentally centered on the concept of risk transfer. When individuals or businesses purchase insurance, they are effectively transferring the financial consequences of certain risks to the insurance company. This means that rather than bearing the full impact of potential losses—such as damage to property, liability for accidents, or medical expenses—policyholders can pay a premium to pass that risk to the insurer.

Insurance companies use the collected premiums to create a pool of funds that can be used to cover claims when an insured event occurs. By spreading the risk across many policyholders, insurance makes it more manageable for individuals and businesses. It allows them to protect themselves against unforeseen financial burdens that could significantly impact their economic stability.

The other options suggest notions that do not accurately represent how insurance functions. Insurance does not eliminate risk; it merely offers protection against financial loss from identified risks. It also does not inherently increase risk or retain risk in a manner that negates its purpose, which is to provide a safety net against specific threats. Thus, the correct understanding of insurance revolves around the crucial idea of transferring risk from individuals to the insurer.