What Happens If an Insurance Fund Grows Excessively Large?

If an insurance fund grows excessively large, it indicates that the exchange's liquidation mechanism is highly effective and generating significant surpluses. Exchanges may choose to reduce the size of the fund by adjusting liquidation parameters, such as reducing the fee collected from liquidations.

Some exchanges may even implement a 'clawback' or 'reimbursement' mechanism to return excess funds to the community or traders over time, though this is rare. An oversized fund suggests potential over-collateralization.