What happens to the risk levels of insurers when a risk is oversubscribed?

When a risk is oversubscribed, the risk levels of insurers typically decrease proportionately. Oversubscription occurs when more capital is offered for a particular risk than is needed. This can arise in competitive markets where multiple insurers are eager to provide coverage for a desirable risk.

As a result of oversubscription, the exposure of each insurer to the risk is reduced. When several insurers share a risk, their individual shares of liability become smaller, effectively spreading the risk among a larger number of underwriters. This reduces the overall risk exposure for each insurer involved. Consequently, insurers may feel more secure, leading them to accept smaller premiums for their contributions to the risk, reflecting their reduced exposure.

The other options do not align with the dynamics of oversubscription. If the risk levels remained unchanged, there would be no benefits to oversubscription, as insurers would continue to hold the same level of risk without dilution. The idea that risk levels could increase proportionately contradicts the principle of risk sharing, and reassignment of risks typically refers to the transfer process or changing of risk owners, which is not directly associated with oversubscription.