Why might an insurer seek to limit coverage under an aggregate limit?

An insurer may look to limit coverage under an aggregate limit primarily to manage risk and avoid excessive payouts. When an aggregate limit is established, it caps the total amount the insurer will pay for all covered losses during a specific period, typically a policy year. This limit helps insurers to maintain financial stability by preventing losses from exceeding an acceptable level. It allows them to anticipate and control potential payouts, ensuring that they can cover claims without jeopardizing their solvency.

In a practical context, if an insurer did not have an aggregate limit, it could face significant financial exposure in a situation where multiple claims occur simultaneously or in quick succession. By implementing such limits, insurers can create a more sustainable business model while still providing coverage to their policyholders. This approach encourages a balance between providing protection and managing the financial risks associated with underwriting insurance.