IIQE Paper 1 Principles and Practice of Insurance Examination Quiz 02 Advanced

When an existing customer or beneficial owner is later identified as a non-Hong Kong PEP (Politically Exposed Person), enhanced due diligence (EDD) measures are required.

Statement I: Obtaining approval from senior management for continuing the business relationship is a standard EDD measure for PEPs. This allows for a higher level of oversight and scrutiny.

Statement II: Taking reasonable measures to establish the customer’s or beneficial owner’s source of wealth and source of funds is a crucial EDD step. This helps to verify the legitimacy of the funds and identify any potential risks.

Statement III: While ongoing monitoring is essential, immediately terminating the business relationship solely based on the PEP status without further investigation is not a standard requirement. EDD aims to manage the risk, not necessarily eliminate the relationship.

Statement IV: Reporting the customer to the Hong Kong Monetary Authority (HKMA) immediately upon discovering their PEP status is not a standard requirement. Reporting is typically triggered by suspicion of money laundering or terrorist financing, not PEP status alone.

Therefore, statements I and II are correct.

The Insurance Authority (IA) possesses several powers to oversee insurers and safeguard policyholder interests. These powers are invoked when an insurer faces financial instability or engages in practices detrimental to policyholders.

Limiting premium income is a regulatory measure to curb rapid growth that could strain an insurer’s financial resources and ability to meet future liabilities. Restrictions on investments ensure insurers invest prudently, minimizing risk and maintaining solvency. These restrictions can pertain to the types of assets and their geographical locations.

Imposing restrictions on new business allows the IA to control the volume of new policies an insurer can issue, preventing overextension. Appointing a trustee to oversee the custody of assets provides an extra layer of security for policyholder funds. A special actuarial investigation is initiated when there are concerns about an insurer’s ability to meet its financial obligations, involving a thorough review of its financial position.

In severe cases, the IA can appoint a manager to assume control of the insurer’s operations, implementing corrective measures. As a last resort, the IA can petition the courts to wind up (liquidate) the insurer, ensuring an orderly distribution of assets to policyholders and creditors. Therefore, all the listed actions are powers the IA can exercise over insurers.

The principle of utmost good faith requires both parties to an insurance contract to act honestly and disclose all material facts. A material fact is any information that would influence a prudent insurer’s decision to accept the risk or determine the premium.

* **Option I:** The duty of utmost good faith revives at each policy renewal, requiring the insured to disclose any new material facts that have arisen since the original policy inception or last renewal.
* **Option II:** If an insured requests alterations to their policy during its term, the duty of utmost good faith applies specifically to those changes. The insured must disclose any material facts relevant to the requested alteration.
* **Option III:** The duty to disclose material facts generally ceases once the insurance contract is concluded. Facts that come to the proposer’s knowledge after the contract is in place do not need to be disclosed unless the policy terms specify otherwise.

Therefore, statements I and II are correct.

Statement I is correct. Charging higher premiums to women solely based on gender stereotypes related to driving ability constitutes unfair discrimination, as highlighted in the IIQE Paper 1 materials.

Statement II is incorrect. While refusing household insurance to someone based on marital status (being divorced or a single parent) is an example of unfair discrimination, the statement incorrectly attributes this to motor insurance rather than household or fire insurance.

Statement III is correct. Money laundering involves disguising illegally obtained funds to appear legitimate, which is a key concept covered in the IIQE Paper 1 syllabus.

Statement IV is incorrect. Terrorist financing involves providing resources to support terrorist activities, not solely drug trafficking. Drug trafficking is associated with money laundering, but terrorist financing has a broader scope, as defined by the United Nations (Anti-Terrorism Measures) Ordinance (Cap.575) ( “UNATMO ”) and the United Nations Sanctions Ordinance (Cap. 537) ( “UNSO ”).

Therefore, statements I and III are correct.

Statement I is correct. According to the guidelines for licensed insurance brokers, they should not mislead or deceive clients and must ensure the accuracy of information provided about insurers, intermediaries, or products.

Statement II is correct. Licensed insurance brokers are prohibited from making inaccurate, misleading, or deceptive statements or comparisons to induce a client to enter into a policy or replace an existing one.

Statement III is incorrect. While licensed insurance broker companies should ensure their advertising and marketing materials are accurate and not misleading, the prohibition on disparaging materials applies to *other* brokers or insurers, not generally.

Statement IV is incorrect. A licensed technical representative (broker) should only use advertising or marketing materials supplied or approved by its appointing licensed insurance broker company. This statement is correct, but the question asks for exceptions, and this is a rule, not an exception.

Therefore, statements I and II are correct.

I. Correct. According to the Insurance Authority’s Guideline on Anti-Money Laundering and Counter-Terrorist Financing (AML/CFT) (GL3), an Insurer should appoint a Money Laundering Reporting Officer (MLRO) as part of its AML/CFT systems.
II. Correct. Insurers are required to implement clear policies and procedures regarding internal reporting, reporting to the Joint Financial Intelligence Unit (JFIU), post-reporting risk mitigation, and preventing tipping off, as outlined in GL3.
III. Incorrect. While keeping proper records of internal reports and STRs is essential, the AMLO and GL3 require these records to be kept for at least five years after the end of the business relationship, not three years.
IV. Incorrect. Individual insurance agents are typically required to provide all customer and transaction-related documentation to the insurer directly, and they do not have the capacity to maintain such documents. The agent is considered to have deposited the required records and documents at the premises of the insurer.

Therefore, statements I and II are correct.

I. Correct. Insurance brokers, acting as agents of the policyholder, owe a duty of care to their clients. Failing to exercise reasonable care can lead to professional negligence claims.
II. Correct. As per the Insurance Ordinance (IO), insurance agents must adhere to the rules, codes, and guidelines issued by the Insurance Authority (IA).
III. Incorrect. Insurance agents typically represent the insurer, not the insured. Their primary responsibility lies with the insurer, although they must still act legally and ethically towards policyholders.
IV. Correct. The Personal Data (Privacy) Ordinance in Hong Kong applies to all persons and the Government, safeguarding personal data privacy regardless of whether the data is automatic or manual.

The doctrine of contribution is an equitable principle applied between insurers when double insurance exists. Double insurance occurs when two or more policies are effected by or on behalf of the same insured, covering the same interest, peril, and subject matter, and the total sums insured exceed the indemnity allowed.

Statement I is correct. Contribution arises when multiple policies cover the same loss, each providing indemnity. This is a fundamental requirement for contribution to apply.

Statement II is correct. The policies must cover the same interest. If one policy covers the owner’s interest and another covers a bailee’s interest, contribution does not apply.

Statement III is incorrect. While policies must cover the same peril and subject matter, they do not necessarily need to have identical policy conditions for contribution to apply. The key is that each policy is liable for the loss, subject to its own terms and conditions.

Therefore, statements I and II are correct.

Statement I is correct. An automatic reinstatement clause in a liability policy allows the policy’s aggregate limit to be restored after a claim is paid, up to a pre-agreed number of reinstatements. This ensures continued coverage for subsequent incidents during the policy period.

Statement II is incorrect. The ‘average’ in marine insurance refers to a partial loss, not a total loss. Total losses are handled differently under marine insurance policies.

Statement III is correct. In non-marine insurance, ‘average’ refers to a policy provision that penalizes the insured for underinsurance. If the insured is underinsured, they will only receive a proportion of their claim.

Statement IV is incorrect. A bailee is someone who takes possession of goods with the owner’s consent but without the intention of transferring ownership. The bailee does not necessarily have to pay for the goods; they are simply responsible for their safekeeping.

Statement I is correct. The IA (Insurance Authority) can impose restrictions on an insurer’s premium income if it’s growing too rapidly, potentially leading to difficulties in meeting future liabilities. This is a measure to ensure the insurer’s financial stability and protect policyholders.

Statement II is correct. The IA can restrict the types and locations of an insurer’s investments. This control is in place to manage risk and ensure that the insurer’s assets are secure and can meet its obligations.

Statement III is incorrect. While the Code of Conduct for Insurers, implemented by the HKFI, aims to set standards for good insurance practice, it applies to individual policyholders resident in Hong Kong, insured in their private capacity only. It does not apply to company policyholders.

Statement IV is incorrect. The Code of Conduct for Insurers focuses on areas like underwriting, claims, product understanding, customer rights, and the industry’s public image. It does not directly address the custody of assets by an approved Trustee; this is a separate regulatory measure that the IA can impose.

Therefore, statements I and II are correct.

The Hong Kong Confederation of Insurance Brokers (HKCIB) and the Professional Insurance Brokers Association (PIBA) are key professional bodies for insurance brokers in Hong Kong. While they previously had self-regulatory functions, this role ceased with the implementation of the new regulatory regime for licensed insurance intermediaries on September 23, 2019. Currently, both organizations actively represent their members by engaging with the Insurance Authority, providing policy recommendations affecting the local insurance broking industry, and offering relevant training to their members. The Insurance Complaints Bureau (ICB) handles complaints. The Motor Insurers’ Bureau (MIB) provides compensation for road accident victims when compulsory insurance is absent or ineffective. The Employees Compensation Insurer Insolvency Bureau (ECIIB) manages the Employees’ Compensation Insurer Insolvency Scheme, covering liabilities of insolvent member insurers under employees’ compensation policies. The Employees’ Compensation Insurance Residual Scheme (ECIRS) acts as a market of last resort for employers struggling to obtain employees’ compensation insurance for high-risk occupations.

According to the Insurance Authority’s guidelines on General Principle 1 (Honesty and Integrity), a licensed insurance agent must adhere to several standards and practices. This includes providing accurate representations and presentations, complying with all applicable laws, rules, and regulations, and cooperating with regulatory authorities. Specifically, agents must not mislead clients, make deceptive statements, or use unapproved advertising materials. They must also report significant events like bankruptcy, criminal convictions (excluding minor offenses), or disciplinary actions by other regulatory bodies to both the Insurance Authority and their appointing insurer or agency. The principle emphasizes maintaining honesty, ethical conduct, and integrity in all dealings related to regulated activities.

The Insurance Ordinance (IO) in Hong Kong categorizes insurance business into Long Term Business and General Business. Long Term Business primarily encompasses Life Insurance and is further divided into nine classes (A to I). General Business is divided into 17 categories (1 to 17). Understanding these classifications is crucial for regulatory compliance and business operations within the Hong Kong insurance market. The statutory classification is important for the insurance regulator’s authorization and supervision. Not all classes have equal significance in the day-to-day business; some classes like Marriage and birth (B), Tontines (E) or Capital redemption (F) are less common.

Statement I is correct. According to Section 68(1) of the Insurance Ordinance (IO), an authorized insurer is vicariously liable for the actions of its appointed insurance agents when dealing with clients regarding insurance contracts, regardless of whether the agent’s actions are within their authorized scope.

Statement II is incorrect. While Section 68 addresses vicarious liability, it also provides conditions under which an insurer is NOT liable. One such condition is if the agent disclosed that the act was outside their authority before the client relied on it.

Statement III is correct. The Insurance Ordinance (IO) stipulates that if multiple authorized insurers have appointed the same agent, and the agent’s actions fall within the scope of authority granted by one insurer (the ’empowering insurer’), that insurer is liable.

Statement IV is incorrect. The Insurance Ordinance (IO) stipulates that if multiple authorized insurers have appointed the same agent, and the agent’s actions fall within the scope of authority granted by two or more insurers (the ’empowering insurers’), those insurers are jointly and severally liable. If the act is outside the scope of authority from any of those insurers, all those insurers are jointly and severally liable. It is not the case that only the insurer with the largest market share is liable.

Therefore, statements I and III are correct.

This question assesses the understanding of the Insurance Ordinance (IO) requirements regarding client accounts and deductible limits for licensed insurance broker companies in Hong Kong.

Statement I is correct. According to section 71 of the IO, a licensed insurance broker company must maintain at least one client account with an authorized institution, with the word ‘client’ in the account title, and provide written notice to the institution.

Statement II is incorrect. The deductible amount under a licensed insurance broker company’s PII policy must not exceed 50% of the company’s net assets as at the end of its financial year immediately before the commencement date of the policy period. The question is testing the candidate’s understanding of the deductible limit.

Statement III is correct. For a company in its first 12 months of operation, the deductible amount must not be more than 50% of the company’s paid-up share capital as at the commencement date of the policy period.

Therefore, statements I and III are correct.

Short-tail business in insurance refers to classes where claims arise and are notified relatively quickly. Fire insurance typically involves immediate notification and claim processing following a fire incident. Motor (own damage) insurance also falls under this category as damages are usually assessed and claims are made shortly after an accident. Marine cargo insurance, while related to transportation, can sometimes involve longer periods for loss discovery and claim settlement, especially in cases of international shipping and complex investigations. Liability insurance, on the other hand, often involves extended periods between the occurrence of an incident, the filing of a claim, and the final settlement, making it a long-tail business.

Statement I is correct. Insurers are expected to issue claim forms promptly and without any charges to the policyholder. This facilitates the claims process and ensures accessibility for all policyholders.

Statement II is correct. If a claim cannot be admitted, the insurer is obligated to provide a reasonable explanation to the claimant. This promotes transparency and helps the claimant understand the reasons for the claim denial.

Statement III is incorrect. The Insurance Complaints Bureau (ICB) handles disputes between insurers and individual policyholders related to personal insurance contracts. While it can adjudicate claim-related disputes, it also offers mediation services for non-claim related insurance disputes of a monetary nature. However, the ICB does not have jurisdiction over insurance intermediaries’ misconduct.

Statement IV is incorrect. The Insurance Claims Complaints Panel consists of four members, with two members coming from the insurance industry and two from outside the insurance industry. The panel is led by an independent Chairman appointed by the ICB with the prior consent of the Secretary for Financial Services and the Treasury.

Therefore, only statements I and II are correct.

Statement I is correct. According to the Insurance Ordinance, a licensed insurance intermediary must consider the policyholder’s circumstances to ensure the regulated activity is appropriate for them. Statement II is correct. Intermediaries are required to disclose necessary information to policyholders or potential policyholders to enable them to make informed decisions. Statement III is incorrect. While intermediaries must avoid conflicts of interest and disclose them, the requirement to ‘ensure that the assets of the policyholder or potential policyholder are promptly and properly accounted for’ is a separate requirement, not directly related to conflict of interest disclosure. Statement IV is correct. Licensed insurance intermediaries must comply with the rules prescribed by the Insurance Authority (IA) under specified sections of the Insurance Ordinance. Therefore, statements I, II, and IV are correct.

The United Nations (Anti-Terrorism Measures) Ordinance (UNATMO) criminalizes providing or collecting property to commit terrorist acts, or making property or financial services available to terrorists or terrorist associates. The maximum penalty for these offenses is imprisonment for 14 years and an unlimited fine. The UNATMO also makes it an offense to fail to disclose knowledge or suspicion of terrorist property, with a maximum penalty of 3 months imprisonment and a HK$50,000 fine. ‘Tipping off’ under UNATMO carries a maximum penalty of 3 years imprisonment and a fine. Therefore, providing funds for terrorist acts carries a significantly higher penalty than failing to disclose knowledge of terrorist property.

Unfair discrimination in insurance, as addressed by anti-discrimination laws, involves treating individuals or groups inequitably based on characteristics unrelated to risk assessment. Charging higher premiums or imposing stricter terms on women for motor insurance based on gender prejudice, or denying household insurance to a woman solely because she is divorced or a single parent, are examples of unfair discrimination. These practices are prohibited. Money laundering (ML) involves disguising illegally obtained funds to appear legitimate, often involving placement, layering, and integration stages. Terrorist financing (TF) refers to providing financial support to terrorist organizations. Proliferation financing (PF) involves providing funds or financial services for the manufacture, acquisition, possession, development, export, trans-shipment, brokering, transport, transfer, stockpiling or use of nuclear, chemical or biological weapons and their means of delivery and related materials. The insurance industry is vulnerable to ML, TF and PF, particularly through long-term insurance policies.

Statement I is correct. A trustee holds property on trust for the benefit of another, managing it according to the terms of the trust. This is a fundamental aspect of trust law.

Statement II is incorrect. Underwriting is the process used by insurers to assess risk and determine whether to offer insurance, and on what terms. It is not related to the role of a trustee.

Statement III is correct. An unenforceable contract is one that a court of law will not uphold, meaning no legal action can be taken to force compliance. This is a key concept in contract law.

Statement IV is incorrect. Unit-linked insurance involves policyholder contributions being used to purchase units in an investment fund, linking the policy’s value to the fund’s performance. This has no direct connection to unenforceable contracts.

Therefore, statements I and III are correct.

Statement I is correct. According to the guidelines for licensed insurance agents, regulated advice should be suitable for the client based on the information obtained, including their circumstances.

Statement II is correct. If a client insists on making a decision contrary to the agent’s recommendation, the agent should document the recommendation, the client’s reasons, the agent’s explanation of unsuitability, and the fact that the decision is the client’s own.

Statement III is incorrect. Licensed insurance agents should strive to avoid conflicts of interest. When avoidance is impossible, they should manage them with appropriate disclosure to ensure fair treatment of clients, as per General Principle 7.

Statement IV is incorrect. To provide transparency, an agent should disclose that they are appointed by an insurer or agency to promote, advise on, or arrange the insurance products offered by that insurer or agency. They should also disclose that the products they can promote are limited to those offered by their appointing insurer or agency. This is to avoid potential conflicts of interest.

Therefore, statements I and II are correct.

Let’s analyze each of the insurance policy provisions to determine if they could result in a claim payment exceeding indemnity.

Statement I: ‘New for Old’ cover implies that in the event of a loss, the insured receives a brand new replacement for the damaged or lost item, regardless of its age or depreciation. This clearly provides more than indemnity, as indemnity aims to restore the insured to their pre-loss financial position, considering depreciation. Therefore, statement I is correct.

Statement II: Agreed value policies involve the insurer and insured agreeing on the value of the insured item at the policy’s inception. In the event of a total loss, the agreed value is paid out, regardless of the item’s actual market value at the time of the loss. This can result in a payment exceeding indemnity if the agreed value is higher than the actual value at the time of loss. Therefore, statement II is correct.

Statement III: Reinstatement insurance provides for the replacement or repair of damaged property with new property, without deduction for depreciation. This means the insured receives the full cost of replacing the damaged property with new, equivalent property, which exceeds the principle of indemnity. Therefore, statement III is correct.

Statement IV: The condition of average is a policy provision that applies when the insured has underinsured their property. If a loss occurs, the insurer will only pay a proportion of the claim, reflecting the extent of the underinsurance. This provision ensures that the insured bears a portion of the loss themselves and does not result in a payment exceeding indemnity. Therefore, statement IV is incorrect.

In conclusion, statements I, II, and III are correct.

The Insurance Ordinance (IO) distinguishes between different types of insurance intermediaries, including licensed insurance agents and licensed insurance brokers. A ‘Regulated Person’ is defined broadly to encompass licensed insurance intermediaries, responsible officers of licensed insurance agencies or broker companies, and individuals involved in the management of regulated activities within these agencies or broker companies. Responsible officers must be licensed technical representatives and their appointment requires prior approval from the Insurance Authority (IA). The IO also addresses vicarious liability, particularly Section 68, which outlines the circumstances under which an authorized insurer is liable for the actions of its appointed agents. This section specifies scenarios involving multiple insurers and the agent’s scope of authority. The transitional arrangements under the IO aimed to ensure a smooth transition from the old to the new licensing regime, granting deemed licenses to existing registered intermediaries for a three-year period. Understanding these definitions and the implications of vicarious liability is crucial. The vicarious liability of the authorized insurer is specified under Section 68 of the Insurance Ordinance (IO).

Statement I is correct. A ‘more specifically insured’ provision acts as a non-contribution clause, meaning that if an item is covered under a more specific insurance policy (e.g., an all-risks policy), it’s excluded from a less specific policy (e.g., household contents insurance). This prevents double recovery.

Statement II is incorrect. The Motor Insurers’ Bureau (MIB) compensates victims of motor accidents where compulsory insurance is absent or defective, ensuring that victims receive compensation as intended by compulsory motor insurance. It does not handle all motor insurance claims.

Statement III is correct. ‘New for Old’ cover means that claim settlements are not reduced due to wear and tear or depreciation. This is common in personal lines property insurance, although some items like clothing may be excluded from this provision.

Statement IV is incorrect. Ordinary good faith, under common law, requires parties to not lie or deliberately mislead each other. However, it does not mandate the disclosure of all known facts, only those requested through specific questions. Utmost good faith, which applies to insurance contracts, requires a higher standard of disclosure.

Therefore, statements I and III are correct.

The Insurance (Maximum Number of Authorized Insurers) Rules, established under sections 64I(1) and 129(1) of the Insurance Ordinance (IO), govern the number of insurers an agent can represent. Rule 3 specifies that a licensed insurance agency or individual agent can be appointed by a maximum of four authorized insurers, with no more than two authorized to conduct long-term business. Rule 4 outlines principles for counting insurers, distinguishing between general and long-term business appointments. Rule 5 addresses appointments within groups of companies, clarifying how multiple appointments within the same group are counted. Rule 6 addresses appointments by members of Lloyd’s. The IA also possesses powers of inspection, investigation, and disciplinary action, allowing them to appoint inspectors and investigators to ensure compliance with the IO and its regulations. These officials can require statutory declarations and, if necessary, seek court orders for compliance. Section 81 of the IO empowers the IA to take disciplinary actions against regulated persons for misconduct, including contraventions of the IO, license terms, or other imposed conditions.

When an insured party has multiple insurance policies covering the same risk, the principle of contribution comes into play to ensure they do not profit from the loss. The ‘3/17 event of double insurance’ refers to situations where multiple policies exist. Several clauses and conditions modify how insurers handle such situations. A ‘rateable proportion’ condition dictates that each insurer pays only their proportional share of the loss, based on their policy’s coverage limit. A ‘non-contribution clause’ attempts to make the policy secondary, stating that it will only pay if other policies do not cover the loss. A ‘partial contribution condition’ specifies how a particular policy interacts with other types of policies, such as a marine policy interacting with a fire policy. Subrogation, on the other hand, is the insurer’s right to pursue recovery from a third party who caused the loss, after having indemnified the insured. It prevents the insured from receiving double compensation for the same loss. Subrogation rights can arise in tort, contract, under statute, or in salvage. Subrogation applies only if indemnity applies.

The training and development department plays a crucial role in an insurance company. Statement I is correct because training is indeed vital for both in-house personnel and field staff (agents). Their educational needs should be addressed to ensure competence and compliance. Statement II is also correct; training should align with the company’s goals and contribute to its overall success, not operate in isolation. Statement III is correct as well. Education, in the context of insurance, involves pursuing broader learning and professional qualifications, which the company may encourage to enhance staff expertise. Therefore, all three statements accurately reflect the importance and nature of training and development within an insurance company, as outlined in the IIQE Paper 1 syllabus.

Statement I is correct. Under the OSCO and DTROP, failing to disclose knowledge or suspicion of property related to an indictable offense or drug trafficking, as soon as reasonably possible, is an offense punishable by imprisonment and a fine.

Statement II is correct. “Tipping off” under the OSCO and DTROP, which involves disclosing information that could prejudice an investigation after a disclosure has been made, is indeed an offense with a maximum penalty of imprisonment and a fine.

Statement III is incorrect. The maximum penalty for providing or collecting property to commit terrorist acts under the UNATMO is 14 years of imprisonment and a fine of unlimited amount, not 7 years.

Statement IV is incorrect. Under the UNATMO, failing to disclose knowledge or suspicion of property related to terrorist property carries a maximum term of imprisonment of 3 months and a fine of HK$50,000 upon conviction, not imprisonment for 7 years and a fine of unlimited amount.

Therefore, statements I and II are correct.

Statement I is correct. An offer is a clear expression of willingness to enter into a contract on specific terms, which is a fundamental element for contract formation.
Statement II is correct. Acceptance is the unqualified agreement to the terms of the offer, signifying mutual consent to the contract.
Statement III is correct. Consideration is something of value exchanged by each party to the contract, which can be a promise, an act, or forbearance. It is essential for the contract to be legally binding.
Statement IV is correct. Capacity refers to the legal ability of a party to enter into a contract. Certain individuals, such as minors or those with mental incapacities, may have limited or no capacity to contract.
Therefore, all four statements are essential elements of a valid simple contract under contract law principles relevant to IIQE Paper 1.