Final answer:
The insurance industry's model of pooling risk and setting premiums is used to demonstrate how insurers collect sufficient funds to cover claims, which is exemplified by the collection of $186,000 in premiums from 100 drivers to cover varying levels of accident damages.
Step-by-step explanation:
The student's question concerns a scenario involving automobile insurance coverage and claim payout. In this case, a van valued at $8,400 is completely destroyed, and the insurance company reimburses $6,400. This scenario is best understood by examining the insurance industry's approach to risk pooling and financing.
A simplified example of automobile insurance might illustrate this better. Imagine 100 drivers are divided into three risk categories: 60 low-risk drivers with minor damage costing $100 each, 30 medium-risk drivers with average damages of $1,000, and 10 high-risk drivers with significant accidents leading to $15,000 in damages per incident. Without the ability to differentiate risk levels in advance, these groups collectively represent the total risk the insurance company must cover.