What does the principle of indemnity aim to achieve?

The principle of indemnity is a fundamental concept in insurance that aims to restore the insured to the financial position they were in immediately before the loss occurred, without allowing them to profit from that loss. This means that any compensation paid out is designed to cover the actual value of the loss or damage, reflecting the losses incurred without exceeding that amount. Thus, the insured should receive compensation that truly equals their loss and no more, ensuring that the purpose of insurance is met—protection against financial loss rather than creating an opportunity for gain.

In contrast, the first option suggests that indemnity is about ensuring profit from losses, which directly contradicts the essence of indemnity. The second option implies that insurers would provide the full replacement cost regardless of the original value, which is not always the case as replacement costs can vary and must be aligned with the actual loss. Finally, the last statement about offering large sums as a guarantee of safety does not accurately reflect the principle of indemnity, as it misrepresents the purpose of compensation in insurance, focusing instead on the promise of high payouts rather than actual loss compensation.