Upon which principle is insurance based that protects against financial loss?

The principle that insurance is based on to protect against financial loss is indemnity. This principle ensures that an insured party will be compensated for their loss, restoring them to their financial position prior to the loss occurrence, without allowing them to profit from it. Indemnity is fundamental to the insurance contract, as it helps prevent moral hazard where an insured individual may be incentivized to cause more loss or damage because they will receive a payout.

The principles of risk avoidance, risk management, and retention define different strategies for dealing with risk but do not directly address the compensation aspect of financial loss. Risk avoidance involves eliminating exposure to risk, while risk management is a broader strategy used to assess and mitigate risks. Retention refers to accepting the risk and assuming responsibility for any losses that occur, but it does not involve external financial compensation mechanisms like indemnity does. Thus, indemnity stands out as the cornerstone principle that directly ties to financial protection through insurance.