What defines a principle of insurance as 'indemnity'?

The principle of indemnity in insurance is specifically designed to ensure that policyholders are compensated for their actual losses without allowing them to profit from an insurance claim. This principle underscores the notion that insurance is intended to restore individuals to their pre-loss financial state rather than provide them with excess financial gain.

When a loss occurs, the compensation provided by an insurer is based strictly on the value of the loss, minus any applicable deductibles and limits. This means the insured party must be reimbursed only for their actual expenses related to the loss—no more and no less. By adhering to this principle, the insurance market aims to prevent moral hazard, where individuals might be tempted to incur unnecessary risks because they believe they can profit from their insurance coverage.

The other options do not accurately capture the essence of the principle of indemnity. For instance, providing benefits beyond the actual loss would violate this principle, as it would lead to profit from a loss. Similarly, narrowing the focus to theft-related claims or critical illness insurance does not encompass the overarching idea of indemnity, which applies broadly to various forms of losses across multiple types of insurance policies.