In Auto Racing, the Blue flag with the yellow diagonal stripe means that faster cars are approaching. Commonly referred to as the Courtesy Flag, this flag in real life only applies to NASCAR but is used in iRacing for any racing series.
The flag is there to tell backmarkers (slower lapped traffic or slower cars in general) to give way to faster cars. Sometimes when the backmarkers fail to adhere to the courtesy flag, they may get a drive-through penalty.
In iRacing, the flag behaves a little bit differently than in the real world. The flag in the sim is just there to tell you that there is a faster car approaching behind you. Drivers are not obligated to obey the blue flag but are obligated to hold their racing line and should take notice of it and let the faster car pass by safely and cleanly.
NASCAR: Faster Cars Are Approaching.
iRacing: Faster Cars Are Approaching.