How Do Insurance Funds Support High Leverage in Cash-Settled Perpetuals?

Insurance funds are pools of capital maintained by exchanges to cover losses from liquidations that could not be executed at a price better than the bankruptcy price. In volatile markets, a position's value can drop so quickly that the exchange cannot close it before the margin is depleted.

The insurance fund absorbs these 'socialized' losses, preventing the loss from being passed on to profitable traders through an auto-deleveraging system.