Certified Financial Management Specialist Practice Exam

What is the main role of insurance companies?

1. To provide savings accounts

2. To facilitate trading of major assets

3. To offer financial protection against losses

4. To assess credit risks for lenders

The correct answer is: To offer financial protection against losses

The primary role of insurance companies is to offer financial protection against potential losses that individuals or businesses may encounter. This protection is achieved through the pooling of individual risks. Policyholders pay premiums, and in return, the insurance company agrees to cover certain types of losses, such as those resulting from accidents, natural disasters, health issues, or liabilities. By spreading the risk across many policyholders, insurance companies can effectively manage financial stability and provide compensation when claims arise. The focus of insurance is inherently different from other financial functions. For instance, providing savings accounts is primarily associated with banks, which focus on accumulating deposits and paying interest. Similarly, facilitating the trading of major assets is a role more aligned with brokerage firms or financial markets, where the objective is to buy and sell securities and other investments. Assessing credit risks is a function performed by credit rating agencies or lenders to determine the likelihood of a borrower defaulting on a loan, which is not the core function of insurance. Therefore, the choice that accurately reflects the main role of insurance companies is their function in providing financial protection against losses.