Which of the following best describes the principle of indemnity?

The principle of indemnity is a fundamental concept in insurance that ensures the insured is compensated for their loss in a way that restores them to their financial position prior to the loss, but does not allow them to profit from the insurance payout. This principle aims to prevent moral hazard, where someone might take reckless risks if they could gain financially from a loss.

Choosing the answer that states the insured is restored to their pre-loss financial position accurately reflects this principle. When a claim is made, the insurer evaluates the loss and provides compensation that equates to the actual financial loss incurred, thereby putting the insured back in their original financial state before the incident occurred.

The other options do not align with this principle; one suggests that the insured can profit from their losses, while another implies that insurers can deny all claims, which contradicts the very purpose of insurance. The mention of higher premiums also does not pertain to indemnity directly, as premium costs are related to risk assessment and coverage, rather than the principle of restoring financial status after a loss.