Which of the following best describes 'indemnity' in insurance terms?

Indemnity in insurance refers to the principle of compensating the insured party for their loss. This means that when a covered event occurs, the insurance company pays out a sum to restore the policyholder to the financial position they were in prior to the loss, without allowing them to profit from the claim. This principle is fundamental to insurance, as it ensures that the policyholder is made whole after suffering a loss, rather than gaining an unfair advantage.

Other choices, while related to aspects of the insurance industry, do not capture the essence of indemnity. Providing legal defense pertains to liability insurance and the coverage provided to defend against lawsuits. Offering discounts for low-risk clients relates to underwriting and premium setting rather than indemnification. Assessing risk levels is part of the evaluation process that insurers engage in to determine premiums and coverage options, but it does not describe the compensatory function of indemnity. Thus, the first choice is the most appropriate definition of indemnity within the context of insurance.