What does the principle of indemnity aim to achieve in insurance?

The principle of indemnity is a foundational concept in insurance that aims to ensure that the insured party is compensated for their loss to the extent of their actual financial loss, but without allowing them to profit from the insurance payout. This principle prevents the insured from receiving more than what they have lost, thereby maintaining fairness in the insurance contract.

When a loss occurs, the indemnity principle dictates that the reimbursement provided by the insurer should correspond to the actual damage experienced, which helps to restore the insured to the financial position they were in prior to the loss. This is designed to eliminate any moral hazard that could arise if individuals were incentivized to claim more than their actual loss, ensuring that the insurance system remains sustainable and equitable for all participants.

The other options, while they touch upon aspects related to insurance, do not accurately capture the core aim of the indemnity principle. Protecting the insurance company, limiting claims, or encouraging individuals not to file claims diverges from the fundamental concept, which is centered on equitable compensation after a loss. Thus, the correct option highlights the core intent of indemnity.