In Hemingway's own words on the subject:
If a writer knows enough about what he is writing about, he may omit things that he knows. The dignity of movement of an iceberg is due to only one ninth of it being above water.
Hemingway's analogy expresses his take on Modernism. Writers in this period often omitted traditional expositions, denouements, and deep characterization, as they sought to capture the idea of fragmentation as society changed after WWI. The Great War is considered a watershed moment; in its aftermath, all sorts of traditions—including literary ones—were questioned and discarded as not reflecting the reality of modern life.
This type of realistic writing requires more from its readers than earlier literature does. Readers must intuit what the writer leaves unsaid. Only the fragments that the writer presents (the tip of the iceberg) are made obvious, and it is up to readers to help construct meaning by bringing their own experiences to the text. In this way, the story becomes more like life. We don't get the backstory of people that we meet, or clear instruction on how to proceed in our lives. We are only able to function in the world by intuiting our way: through invoking past experiences, interactions, choices, and consequences to navigate the unknown in front of us. Our task of putting together disparate pieces with what we can't know is what Hemingway and other Modernists were trying to capture in this new genre.