The purpose of the principle of indemnity is:

The principle of indemnity serves to ensure that an insured party is compensated for their loss without being able to profit from the insurance claim. This principle is fundamental to the functioning of insurance, as it maintains fairness in the compensation system. It emphasizes the idea that the insured should be returned to their pre-loss financial position rather than receiving an amount that exceeds the actual loss incurred.

By adhering to the principle of indemnity, insurance helps to promote ethical practices within risk management. If this principle were not in place, individuals might be incentivized to either exaggerate losses or engage in fraudulent claims, resulting in adverse financial impacts on the insurance system overall. Thus, the principle of indemnity effectively reinforces the need for insurance to act purely as a recovery mechanism, compensating only for the amount of actual loss suffered.