Put simply, the MOV acts as an open circuit until the voltage across live/ground or neutral/ground exceeds a "clamping voltage". The MOV then presents almost no resistance, making most of the current flow through it rather than through the device under protection. It gets "used up" because passing current through the varistor affects its structure and increases its clamping voltage.
Makes sense then why people say they should be replaced every few years regardless of whether the indicator is still lit or not. Learned a thing today!
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