What is the main principle behind risk transfer in modern insurance?

The main principle behind risk transfer in modern insurance is about shifting the financial risk of loss from an individual or business to an insurance company. Insurance provides a contractual agreement where, in exchange for premium payments, the insurer agrees to assume certain risks and provide financial protection in case those risks materialize. This allows individuals and businesses to engage in various activities without the burden of financial liability should an adverse event occur, as the insurance company will cover the losses up to the agreed terms in the policy.

The concept is foundational to the insurance industry, enabling clients to manage risks more effectively, and it supports the stability of businesses and individuals who may otherwise struggle with unpredictable financial exposures. The other interpretations, such as avoiding all risks, retaining all risks without insurance, or merely sharing risks among peers, do not accurately reflect the goal and functionality of risk transfer in insurance practices.