Which term best describes a financial arrangement that provides compensation for loss?

The term that best describes a financial arrangement providing compensation for loss is insurance. Insurance is fundamentally a system designed to mitigate risk by financially protecting individuals or entities against unforeseen losses. When an individual pays for an insurance policy, they are essentially entering into an agreement where the insurer promises to compensate them for covered losses, thus providing a safety net during uncertain events.

Risk refers more broadly to the chance of loss or adverse outcomes, while hazard signifies conditions or situations that increase the likelihood of a loss occurring, but neither directly involves compensation mechanisms. On the other hand, a premium is the amount paid for an insurance policy, representing the cost of obtaining this financial protection but not describing the arrangement itself. Thus, insurance is the most accurate term for a financial setup that compensates for losses.