What does the concept of indemnity aim to achieve?

The concept of indemnity is foundational in insurance, primarily aiming to restore the insured to the same financial position they occupied immediately before the loss occurred. This principle ensures that the insured is compensated for their loss, but not in a manner that allows them to profit from their insurance coverage. Instead, indemnity serves to prevent the insured from suffering a financial setback due to unforeseen events, thereby ensuring fairness and preventing moral hazard—whereby individuals might take unnecessary risks if they could benefit financially from a loss.

The focus on restoring the insured's pre-loss position distinguishes indemnity from other objectives. It reinforces the idea that insurance is there to provide protection against loss rather than a financial windfall. This principle also establishes the limits of compensation, ensuring that claims are just and proportionate to the actual loss experienced.