Why is it said that insurers cannot profit from a loss?

The assertion that insurers cannot profit from a loss is rooted in the principle of indemnity, which is a fundamental concept in insurance. This principle ensures that an insured person is restored to the financial position they were in prior to the loss, but not in a manner that allows them to gain financially from the situation.

Indemnity serves as a protective measure against moral hazard, which is the risk that an insured individual may take more risks or be less careful because they know they are covered. By adhering to this principle, insurance companies are obligated to only compensate policyholders for their actual losses up to the limits of their policies. This means that once a claim is settled, the insured does not end up with any financial advantage; they should only recover their loss and nothing more. Thus, the insurance system is designed in such a way that profits from losses are not permitted within the operations of an insurer.