Final answer:
The $500 payment after a car accident is due to an auto insurance policy that covers the majority of the repair costs. Insurance allows for the spreading of financial risk across all policyholders, protecting individuals from high costs due to accidents.
Step-by-step explanation:
After filing your insurance claim and only paying $500 for a $3,000 car repair, the reason you paid less is because the remaining $2,500 was covered by your auto insurance policy. Auto insurance allows policyholders to pay premiums in exchange for coverage on larger repair costs resulting from accidents. This system ensures that individual policyholders are protected from high expenses that may arise from accidents, spreading the risk across all insured individuals.
In the provided example, a total of 100 drivers pay into the insurance system, with varying levels of accidents and costs. Despite not knowing who will have an accident or how severe it will be, all the drivers share the collective risk. This explains why individuals with minor car damage pay premiums that may ultimately contribute to the cost of more severe accidents suffered by others.
Insurance companies classify drivers into risk groups and adjust premiums accordingly. Those in lower risk groups often pay lower premiums than those categorized as higher risk. If individuals were not sorted into risk groups, those with lesser risks would in effect subsidize the costs for those with higher risks.