Registered Insurance Brokers of Ontario (RIBO) Practice Exam

What is the primary function of insurance?

1. To provide tax exemptions

2. Spread of risk

3. Wealth accumulation

4. Administrative support

The correct answer is: Spread of risk

The primary function of insurance is to spread risk among a large number of individuals or entities. By pooling resources, insurance allows individuals to transfer their risk of financial loss to an insurer, who in turn shares that risk across a broader base of policyholders. This mechanism works because the likelihood of a significant number of insured events happening simultaneously is low, which helps stabilize costs and premiums for consumers. While options like providing tax exemptions, facilitating wealth accumulation, and offering administrative support could be related to specific insurance products or claims processes, they do not capture the fundamental purpose of insurance. The core principle remains centered on risk management and protection, allowing people to feel more secure in facing potential losses.