Other Than Life (OTL) Practice Exam

What is the primary purpose of insurance?

1. To allow you to invest in additional properties

2. To help you save money in case of an accident

3. The sharing of losses of a few among many who pay premiums

4. To guarantee profit from insurance claims

The correct answer is: The sharing of losses of a few among many who pay premiums

The primary purpose of insurance is fundamentally about risk management and financial protection, which is accurately represented by the choice that discusses the sharing of losses among multiple individuals who pay premiums. This concept is based on the principle of risk pooling, where a large group of people contributes to a common fund through their premiums. When a member of this group experiences a loss, such as damage or injury, they can claim compensation from this fund. This system allows individuals to reduce the financial burden of unforeseen events by distributing the risk across many participants. Since not everyone will experience a loss at the same time, premiums from the larger group help to cover the claims made by those who do suffer a loss, allowing for a safety net that provides reassurance and financial support in challenging times. In contrast, the other options suggest purposes that do not capture the essence of insurance. For example, investing in additional properties focuses more on personal financial growth rather than risk management. Helping to save money in case of an accident touches on the financial aspect but doesn't fully encompass the risk-sharing mechanism fundamental to insurance. Lastly, the idea of guaranteeing profit from insurance claims misrepresents the purpose of insurance, which is not designed for profit-making for the insured, but rather for collective protection against financial loss.