Which of the following is a primary function of insurance in finance?

The primary function of insurance in finance is to spread risk across multiple policyholders. This principle is foundational to the operation of insurance companies. By pooling contributions (premiums) from many individuals or entities, insurance companies create a financial reserve that can be used to pay out claims when a loss occurs.

When risks are shared among a large number of policyholders, it mitigates the financial impact on any single individual. For instance, if a natural disaster occurs, not everyone will make a claim at the same time, allowing the insurance company to manage the payouts effectively. This risk diversification is crucial because it ensures that individuals can protect themselves from significant financial loss while having predictable costs (premium payments).

This sharing of risk contributes to overall financial stability for both the individuals and the insurance companies, providing peace of mind that is essential for personal and business financial planning. Other functions mentioned, such as maximizing shareholder wealth, providing loans to businesses, and investing solely in real estate, do not directly represent the core purpose of insurance, which is fundamentally centered around risk management for policyholders.