Which term refers to the practice of protecting a policyholder from a financial loss incurred due to an insured risk?

Indemnification is the process by which an insurer compensates a policyholder for a loss incurred due to a covered risk under the terms of an insurance policy. This concept is foundational to how insurance operates, as it aims to restore the policyholder to the financial position they were in before the loss occurred, without allowing them to profit from the situation.

For example, if a homeowner experiences damage from a fire, indemnification would involve the insurance company paying for the repair costs, up to the limits specified in the policy. This ensures that the insured is protected from financial hardship caused by unexpected events, thereby providing a safety net for policyholders.

In contrast, risk management involves the identification, assessment, and prioritization of risks, but it does not directly relate to the payment of losses. Insurance pooling is about spreading risk among a large group of policyholders to reduce variability in losses, while underwriting is the process insurers use to evaluate the risk of insuring a policyholder and to determine the appropriate premiums. None of these functions directly corresponds to the financial compensation mechanism that indemnification provides.