What is the main purpose of an insurance policy?

The main purpose of an insurance policy is to indemnify a party with an insurable interest in a financial loss. This means that when a specific event occurs that causes a loss—such as damage to property or an accident—the insurance policy provides financial compensation to the insured party to help them recover from that loss. This indemnification is crucial as it helps policyholders manage financial risks and protects their economic interests.

An insurance policy is designed to provide a safety net, ensuring that individuals and businesses are not left to bear the full burden of a financial setback caused by unforeseen events. In this way, insurance serves a critical function in the financial ecosystem, allowing people and organizations to carry on despite potential losses.

While maximizing profit for the insurer and establishing a legal agreement between the parties are important aspects of the insurance industry, they do not encapsulate the primary reason that an insurance policy exists. The focus of an insurance policy is fundamentally about providing coverage and support for potential financial losses rather than ensuring complete safety from all risks, which is often unattainable. Hence, indemnification is at the heart of what insurance aims to achieve.