Canadian Accredited Insurance Broker (CAIB) One Practice Exam

What is the main purpose of an insurance contract?

1. Allow the spread of risk

2. Allow insureds to take more risk

3. Protect you from loss

4. Manage income risk

The correct answer is: Allow the spread of risk

The primary purpose of an insurance contract is to allow the spread of risk. This concept is foundational in the insurance industry, wherein premiums collected from many individuals contribute to a pool that can be used to pay for losses incurred by a few. By pooling risks among a large number of policyholders, insurance companies can stabilize their financial outlook and provide coverage for unexpected events. This means that individuals are not bearing the entire financial burden of a loss alone. Instead, the risk is distributed across the collective group, which makes it more manageable for everyone involved. This pooling effect not only provides security to the insured party but also contributes to overall market stability, reducing the financial uncertainty that individuals would face without insurance. While the other options may have elements that are relevant to the nature of insurance, they do not encapsulate the primary objective of an insurance contract. For instance, while insurance does protect against losses and can motivate individuals to take on more risks by providing a safety net, the essence of what insurance fundamentally achieves is the spreading of risk among many to mitigate the impact of individual losses.