What is the primary purpose of establishing a policy limit?

The primary purpose of establishing a policy limit is to restrict the insurer's liability. This limit represents the maximum amount the insurer will pay for covered losses under the policy. By setting a defined limit, both the insurer and the insured have a clear understanding of the extent of coverage and the financial responsibility in the event of a claim. This also serves to manage risk for the insurer, as it caps their potential losses and helps in maintaining financial stability.

In contrast, options that discuss minimum premiums, unlimited claims, or simplifying the underwriting process do not directly relate to the concept of policy limits. Minimum premiums are separate considerations in insurance pricing, unlimited claims would contradict the very concept of limits, and while underwriting processes may vary, they are not primarily concerned with the establishment of policy limits.