What type of risk management is insurance primarily used to manage?

Insurance is primarily used to manage pure risk, which is characterized by situations that present the possibility of loss or no loss, but not gain. This type of risk contrasts with speculative risk, which involves the potential for both gains and losses, such as investing in the stock market or starting a business. Pure risk encompasses scenarios such as property damage, personal injury, and liability claims—events for which insurance can provide protection against financial loss.

When an individual or business faces pure risks, insurance policies can be purchased to transfer some of the financial burden of those risks to an insurance company. If a covered event occurs, the insured receives compensation to help mitigate the financial impact, allowing them to recover from losses without facing catastrophic financial consequences.

In contrast, financial risk involves uncertainty regarding return on investments, and operational risk pertains to the potential for loss resulting from inadequate or failed internal processes or systems. While insurance may play a minor role in addressing certain aspects of these risks, it is not the primary tool for their management. Thus, the correct answer highlights the specific focus of insurance on managing pure risk.