Canadian Accredited Insurance Broker (CAIB) One Practice Exam

What is the principle of indemnity?

1. To ensure a profit is made from insurance claims

2. To guarantee a return on the premium

3. To provide actual compensation for the loss incurred

4. To eliminate all forms of risk

The correct answer is: To provide actual compensation for the loss incurred

The principle of indemnity is designed to provide actual compensation for the loss incurred, ensuring that the insured is restored to the same financial position they were in prior to the loss, without experiencing a profit from the claim. This principle helps to prevent insurance from becoming a source of profit for the insured, which would go against the foundational purpose of insurance as a risk management tool. Indemnity is crucial in promoting fairness within insurance contracts, creating a balance between the insurer's obligations and the insured's losses. By focusing on compensating actual loss rather than providing a profit or guaranteed returns, the principle of indemnity maintains the integrity of the insurance system and ensures that resources are allocated appropriately to those who suffer legitimate losses.