What principle states that a loss should restore the insured to their approximate financial condition prior to the loss?

The principle that states a loss should restore the insured to their approximate financial condition prior to the loss is known as indemnity. This principle is fundamental in insurance as it ensures that the insured does not profit from a loss, but rather is put back in the same financial position they were in before the incident occurred.

Indemnity is designed to promote fairness and equity in the claims process, preventing any moral hazard that might arise if an insured were to financially benefit from a loss scenario. By adhering to this principle, insurance serves its primary function of protection against financial loss while maintaining the integrity of the system.

The other options, while relevant concepts in insurance, do not encapsulate this specific principle. For instance, subrogation refers to the insurer's right to pursue a third party responsible for a loss after it has compensated the insured. Risk pooling involves the gathering of premiums from many individuals to distribute the financial risk among them. Retention pertains to the strategy of keeping a portion of risk and not transferring it to an insurer, which is more about risk management than restoration after a loss.