What is the primary function of insurance indemnity?

The primary function of insurance indemnity is to restore the individual to the financial state they were in before the loss occurred. This principle is fundamental to the concept of insurance, which is designed to provide compensation for losses rather than to profit from them. The intent is to make the insured whole again, meaning that they should not experience an economic disadvantage as a result of an unexpected event.

In the context of indemnity, coverage is focused on compensating for actual losses incurred rather than exceeding them or providing any additional gain. This operates under the premise that insurance is not a means of financial enrichment but a protective measure against unforeseen financial hardships.

Other options suggest goals that do not align with the true purpose of indemnity. For instance, punishing negligent behavior contradicts the foundational principle of risk sharing in insurance. Additionally, while insurance can help mitigate future risks, it cannot prevent all future losses, which is a natural part of risk management. Lastly, distributing wealth among policyholders doesn't reflect the individual nature of indemnity, which is centered around personal loss rather than wealth redistribution.