What Are the Risks Associated with an Underfunded Exchange Insurance Pool?

An underfunded insurance pool increases the risk of "socialized losses" or the activation of the Auto-Deleveraging (ADL) system. If the pool cannot cover the losses from liquidated accounts, the exchange must use ADL to forcibly close profitable positions, which is detrimental to trader confidence and market stability.

In the worst case, the exchange could become insolvent.