What type of risk management does insurance provide?

Insurance primarily provides financial protection against losses, which serves as a crucial aspect of risk management. When an individual or business purchases insurance, they shift part of their financial risk to the insurance company. In the event of an unexpected loss—such as damage to property, medical expenses, or liability for accidents—the insurance policy helps to cover those losses, alleviating the financial burden on the insured party.

This mechanism allows insured individuals and organizations to recover from setbacks without facing severe financial hardship, enabling them to maintain their stability and continue their activities.

The other options, while related to different aspects of risk, do not directly encompass the protective financial function that insurance provides. Underwriting risk pertains to the risk an insurer takes when providing insurance coverage and assessing the likelihood of a claim. Operational risk refers to risks arising from operational failures in processes or systems, while inflation risk relates to the potential decrease in purchasing power due to rising prices. These concepts do not capture the essence of how insurance operates as a tool for financial protection against losses.