Final answer:
It is true that not all expenses incurred in an accident may be covered by your insurance policy, due to the nature of imperfect information and specific policy terms. Insurance works by pooling risk and using collected premiums to cover losses, but this does not guarantee total coverage of all expenses.
Step-by-step explanation:
It is true that some of the expenses incurred in an accident may not be covered by your policy. This reflects the concept of imperfect information in the insurance industry, where future events cannot be predicted with certainty, and the risk associated with any individual can be difficult to estimate. Moreover, insurance policies have specific terms and coverage limits that may exclude certain types of damage or injuries. For instance, if you are involved in a car accident, your auto insurance might cover the cost of repairing your vehicle and medical expenses up to a certain limit, but it may not cover all the incurred expenses like higher medical costs or loss of personal items in the car.
Insurance works based on pooling risks and premiums paid by the insured individuals. The aggregated premiums are used to cover the damages of those within the pool who suffer losses, as described by the example of 100 drivers with varying accident costs. However, the coverage is determined based on the policy's terms, which can result in some expenses being out-of-pocket for the policyholder.