Which insurance principle ensures that the insured does not profit from a loss?

The principle that ensures the insured does not profit from a loss is known as indemnity. This principle is fundamental in insurance, as it is designed to restore the insured to their pre-loss financial position, rather than allowing them to gain from an insurance payout. By adhering to this principle, the insurance system works to maintain fairness and prevent moral hazard, where individuals might engage in negligent or reckless behavior because they believe they will be compensated regardless of their actions.

Indemnity operates by providing compensation only up to the extent of the loss incurred. For example, if a person's car is damaged, indemnity would ensure that they receive a payout equal to the cost of repairs or the actual cash value of the vehicle, but no more. This approach directly supports the notion that insurance is meant to cover losses, not to serve as a means of financial gain.

In contrast, other concepts such as subrogation, risk transfer, and underwriting play different roles within the insurance framework. Subrogation allows an insurer to seek reimbursement from a third party responsible for a loss after compensating the insured. Risk transfer refers to the practice of shifting the burden of risk from one party to another, often through insurance policies. Underwriting is the process by which insurers evaluate and decide