IIQE Paper 1 Principles and Practice of Insurance Examination Quiz 88

An insurance broker, by holding themselves out as an expert, owes a higher duty of care to their clients. This means they must exercise reasonable skill and diligence in advising clients, and failure to do so can lead to professional negligence. The Personal Data (Privacy) Ordinance (PDPO) in Hong Kong mandates that data users, including insurance intermediaries, must adhere to data protection principles when collecting and handling personal data. Principle 1 specifically requires that personal data be collected for lawful and fair purposes, and that data subjects are informed about the purpose of collection. Therefore, an insurance broker must ensure that the purpose for collecting client data is clearly communicated, aligning with both their professional duty of care and the requirements of the PDPO.

An insurance broker has a fundamental duty to prioritize their client’s interests above all other considerations. This principle is paramount when providing advice or arranging insurance. Limiting a client’s choices of insurers without a valid reason would be a breach of this duty, as it restricts the client’s ability to secure the most suitable coverage. Similarly, being overly reliant on a single insurer can lead to a lack of objective advice and potentially disadvantage the client. Therefore, a broker must ensure they offer a reasonable range of options and maintain independence from any single insurer to uphold their fiduciary responsibility.

This question tests the understanding of how subrogation proceeds are shared when the recovery from a negligent third party exceeds the total loss suffered by the insured. In the ‘Excess’ method of subrogation sharing, the insurer is typically reimbursed first for the amount they paid out. If the recovery is more than what the insurer paid, the excess amount goes to the insured until they are made whole for their uninsured portion of the loss. In this scenario, the insured’s loss was $10,000, and the insurer paid $40,000. The total loss is $50,000. The recovery is $45,000. The insurer is entitled to be repaid the $40,000 they paid. The remaining $5,000 ($45,000 – $40,000) then goes to the insured to cover their $10,000 uninsured portion of the loss. Therefore, the insured receives $5,000 and the insurer receives $40,000.

The core of underwriting in general insurance involves a continuous assessment of risks. Unlike life insurance, where underwriting is a singular event at policy inception, general insurance policies are subject to periodic review at renewal. This allows the insurer to adjust terms, premiums, or even decline renewal based on the evolving risk profile or claims experience of the insured. Therefore, the ability to modify or terminate coverage at renewal is a key characteristic of general insurance underwriting, distinguishing it from the more static nature of life insurance underwriting.

The Personal Data (Privacy) Ordinance (PDPO) mandates that data users must take specific actions before using personal data for direct marketing or providing it to others for the same purpose. This includes informing the data subject about the intended use or provision and offering a clear channel for them to object. While a contract is a primary method for data users to impose obligations on data processors regarding data security and handling, the PDPO also allows for ‘other means’ of compliance. These ‘other means’ are not contractually defined but generally refer to non-contractual oversight and auditing mechanisms. Therefore, a data user can utilize these non-contractual oversight mechanisms to ensure a data processor adheres to data protection requirements, even if a formal contract is not in place for that specific aspect.

The Insurance Authority (IA) Code of Conduct outlines the criteria for determining if an individual is fit and proper to be registered. Clause 6/31 (ix) specifically states that a person must have passed the relevant papers of the Insurance Intermediaries Qualifying Examination (IIQE) recognized by the IA, unless exempted. This demonstrates a fundamental requirement for demonstrating competence and knowledge in the insurance field, which is a key aspect of being fit and proper. While other factors like compliance history and age are important, the IIQE qualification is a direct measure of the necessary knowledge base.

The question tests the understanding of policy provisions that can lead to a payout exceeding the actual loss incurred (i.e., more than indemnity). ‘New for Old’ cover means that if an item is damaged or destroyed, it is replaced with a new item, regardless of the age or depreciation of the original. This often results in a payout greater than the depreciated value of the lost item, thus exceeding pure indemnity. Agreed value policies fix the value of the insured item at the commencement of the policy. If the item is lost or destroyed, the insurer pays the agreed value, which might be higher than the market value at the time of the loss. Reinstatement insurance allows the insured to repair or replace the lost or damaged property to a condition substantially the same as it was before the loss, without deduction for depreciation. This can also lead to a payout exceeding the depreciated value. The condition of average, conversely, is a condition that limits the payout to the proportion that the sum insured bears to the actual value of the property. If the property is underinsured, the payout will be less than the loss, thus enforcing indemnity and preventing a payout greater than the loss.

The HKFI’s ‘Guidelines on Complaint Handling’ emphasize that insurers must ensure customers are aware of how and where to lodge complaints. This includes making the internal complaint handling procedures readily available. Publishing these procedures, providing access in all offices, and supplying them freely upon request or automatically to complainants are key components of ensuring accessibility. Informing new customers about the availability of these procedures further reinforces this principle. Therefore, a failure to inform new customers about the complaint handling process directly contradicts the accessibility requirements outlined in the guidelines.

The Insurance Agents Registration Board (IARB) is the body responsible for registering insurance agents and handling complaints against them, as outlined in the Code of Practice for the Administration of Insurance Agents. This function is crucial for maintaining professional standards and consumer protection within the insurance industry in Hong Kong. While other bodies like the Insurance Claims Complaints Bureau handle claims-related disputes, the IARB’s mandate specifically covers the registration and conduct of agents.

This question tests the understanding of product development within the insurance industry, specifically focusing on how insurers adapt to market dynamics. Product research is the systematic process of identifying customer needs, market gaps, and emerging trends to inform the creation or modification of insurance products. This proactive approach ensures that the insurer’s offerings remain competitive and relevant, aligning with the core principles of product development and market responsiveness as outlined in the syllabus. Options B, C, and D describe related but distinct activities. While underwriting involves risk assessment, claims handling deals with post-loss settlements, and actuarial pricing focuses on premium calculation, none of these directly encompass the broad scope of researching and developing new or improved insurance products to meet market demands.

The Insurance Ordinance (Cap. 41) in Hong Kong categorizes insurance business into two primary types: General Business and Long Term Business. General business encompasses a wide array of non-life insurance products, such as property, motor, and liability insurance. Long Term Business, conversely, deals with insurance contracts that are expected to remain in force for extended periods, typically involving life insurance, annuities, and permanent health insurance. The distinction is crucial for regulatory purposes, including capital requirements and solvency margins, as the risk profiles and operational characteristics of these two categories differ significantly. Therefore, ‘Long Term Business’ is the correct counterpart to ‘General Business’ as defined by the Ordinance.

The question tests the understanding of the definition of a ‘composite insurer’ under Hong Kong insurance regulations. A composite insurer is defined as an insurer that transacts both long-term insurance business and general insurance business. Option B is incorrect because it limits the definition to only general business. Option C is incorrect as it focuses solely on long-term business. Option D is incorrect because it describes an insurer that handles multiple types of general business, but not necessarily both long-term and general business.

This scenario tests the understanding of an agent’s duty of due care and skill. While an agent is expected to act with reasonable skill and diligence, the law does not demand perfection. If an agent makes a mistake due to a lack of reasonable care, the principal may be bound by the agent’s actions in relation to third parties, but the principal can seek recourse from the agent for any losses incurred due to the agent’s negligence. Therefore, the principal would likely be able to recover the additional costs from the agent.

The Insurance Agents Authority (IAA) is the primary regulatory body overseeing insurance intermediaries in Hong Kong. While the Insurance Authority (IA) is the ultimate supervisory authority for the insurance industry, the Insurance Agents Registration Board (IARB), which operates under the auspices of the Hong Kong Federation of Insurers (HKFI), is specifically responsible for the registration and regulation of insurance agents, responsible officers, and technical representatives. The IARB’s functions, as outlined in the provided text, include investigating complaints, referring matters for investigation, receiving reports, requiring disciplinary action, registering and revoking registrations, and reporting breaches to the IA. Therefore, the IARB plays a direct and crucial role in the day-to-day administration and enforcement of the Code of Conduct for Persons Licensed by or Registered with the Insurance Authority concerning insurance agents.

Guidance Note 4 (GN4) on Misconduct, issued by the IARB, specifically addresses the conduct of insurance agents. A key directive within this guidance is that agents must not permit customers to sign blank or incomplete forms. Any modifications made to policy documents after the customer has signed must be initialed by the customer to ensure transparency and prevent potential fraud or misrepresentation. This practice safeguards both the policyholder and the insurer by maintaining the integrity of the application and policy documentation.

The Insurance Companies Ordinance (Cap. 41) mandates that insurance brokers maintain records that adequately explain all transactions, accurately reflect their financial standing, and facilitate the preparation of financial statements that present a true and fair view. These records must also be suitable for auditing. Specifically, they need to detail all dealings with insurers, clients, and the broker themselves, track all income and expenses (including brokerage, commissions, and interest), and list all assets and liabilities. The retention period for these records is a minimum of seven years. Option B is incorrect because while financial position is important, the primary purpose of the records is to explain transactions and enable a true and fair view, not solely to reflect financial position. Option C is incorrect as the records must be auditable, but the primary focus is on explaining transactions and financial position. Option D is incorrect because while convenience is a factor, the core requirement is that the records sufficiently explain transactions and reflect the financial position, not just that they are easily accessible.

The question tests the understanding of policy provisions that can lead to a payout exceeding the actual loss incurred (i.e., more than indemnity). ‘New for Old’ cover means that if an item is damaged or destroyed, it is replaced with a new item, regardless of the age or depreciation of the original. This often results in a payout greater than the depreciated value of the lost item, thus exceeding pure indemnity. Agreed value policies fix the value of the insured item at the commencement of the policy. If the item is lost or destroyed, the insurer pays the agreed value, which might be higher than the market value at the time of the loss. Reinstatement insurance allows the insured to repair or replace the lost or damaged property to a condition substantially the same as it was before the loss, without deduction for depreciation. This can also result in a payout exceeding the depreciated value. The condition of average, however, is a principle that prevents over-insurance. If the sum insured is less than the value of the property, the claim payment is reduced proportionally, ensuring the payout is in line with the proportion of insurance taken out, thus upholding the principle of indemnity.

The Insurance Ordinance (Cap. 41) in Hong Kong categorizes insurance business into two primary segments: General Business and Long Term Business. General business encompasses a wide array of non-life insurance products, such as property, motor, and liability insurance. Long Term Business, conversely, deals with insurance contracts that are expected to remain in force for extended periods, typically involving life insurance, annuities, and permanent health insurance. The distinction is crucial for regulatory purposes, including capital requirements and solvency margins, as the risk profiles and operational characteristics of these two categories differ significantly. Therefore, ‘Long Term Business’ is the correct counterpart to ‘General Business’ as defined by the Ordinance.

The question tests the understanding of the role of approved bodies of insurance brokers as defined by Hong Kong regulations. Section 70 of the Insurance Ordinance empowers the Insurance Authority to approve associations of insurance brokers. These approved bodies, such as the Hong Kong Confederation of Insurance Brokers and the Professional Insurance Brokers Association Limited, play a crucial role in self-regulation and upholding professional standards within the brokerage sector. Option B is incorrect because while brokers must be licensed, the question specifically asks about approved *bodies* that represent them. Option C is incorrect as the Code of Conduct for Insurers applies to insurers, not broker associations. Option D is incorrect because while client accounts are a requirement for brokers, it’s not the primary function of an approved body.

The Personal Data (Privacy) Ordinance (PDPO) mandates that data users ensure the security of personal data entrusted to data processors. This includes obligating the processor to adhere to data protection principles. While contracts are a primary method, the PDPO also allows for ‘other means’ of compliance. These ‘other means’ are not explicitly defined but generally refer to non-contractual oversight and auditing mechanisms that a data user can implement to monitor a data processor’s adherence to data protection requirements. This provides flexibility for situations where a formal contract might not be feasible or sufficient on its own. Therefore, implementing robust internal oversight and auditing procedures, even without a specific contractual clause, can be considered an ‘other means’ of ensuring compliance.

The scenario describes a situation where a registered person is advising a potential policyholder. According to the Conduct of Registered Persons, specifically section 6.2.2g (a)(iii)(6), a registered person has a duty to explain the policy cover being recommended to ensure the potential policyholder understands their purchase. This includes clarifying the benefits, exclusions, and any other relevant terms. Option A correctly reflects this obligation by emphasizing the need for clear explanations of policy features and benefits. Option B is incorrect because while understanding the client’s needs is crucial, it’s a precursor to the explanation, not the explanation itself. Option C is incorrect as it focuses on comparing policies, which is a separate requirement (6.2.2g (a)(iii)(7)), and not the primary duty of explaining the recommended policy. Option D is incorrect because while understanding the client’s financial situation is important for suitability, the core requirement is to explain the policy’s coverage.

The principle of utmost good faith in insurance mandates that all material facts must be disclosed by the proposer to the insurer. A material fact is defined as any circumstance that would influence a prudent insurer’s decision regarding accepting the risk or setting the premium. While common knowledge and facts already known to the insurer are exceptions, a fact that reduces the risk, such as the presence of a sprinkler system, is still considered relevant to the insurer’s assessment of the risk and premium calculation, even if it lowers the risk. Therefore, its non-disclosure, even if it would have led to a lower premium, is a breach of utmost good faith because it impacts the insurer’s judgment.

The Insurance Agents Registration Board (IARB) is responsible for registering insurance agents, responsible officers, and technical representatives. This includes investigating complaints against registered persons and taking disciplinary actions. The IARB also has the authority to revoke registrations if a person is found to be unfit or has breached regulations. While the IARB can refer matters for investigation, it does not directly conduct investigations into insurer solvency, which falls under the purview of the Insurance Authority (IA). The Hong Kong Federation of Insurers (HKFI) provides general direction to the IARB, but the IARB’s specific functions are outlined in the Code.

The United Nations (Anti-Terrorism Measures) Ordinance (UNATMO) empowers the Secretary for Security to freeze assets suspected of being linked to terrorism. Section 4 of the UNATMO specifically prohibits providing property or financial services to or for the benefit of a terrorist or terrorist associate without a license. The question describes a scenario where a financial institution (FI) is asked to facilitate a transaction that, upon review, appears to involve funds originating from a source known to be associated with a designated terrorist entity. Providing financial services in such a situation, without the explicit authorization of the Secretary for Security, would constitute a contravention of the UNATMO. Therefore, the FI must refuse the transaction and report it to the Joint Financial Intelligence Unit (JFIU). Option B is incorrect because while reporting is necessary, refusing the transaction is the immediate and primary action required to prevent a breach of the ordinance. Option C is incorrect because the FI cannot unilaterally decide to proceed with the transaction based on its own assessment of risk; it must adhere to the regulatory framework. Option D is incorrect because while seeking clarification might be a step, the core obligation is to prevent the prohibited act and report it, not to simply delay or seek internal approval without considering the legal prohibition.

This question tests the understanding of how salvage value affects the indemnity provided by an insurance policy. When damaged property has residual value (salvage), this value is factored into the calculation of the loss. The insurer can either deduct the salvage value from the payout, allowing the insured to keep the damaged item, or the insurer can take possession of the salvage and dispose of it, paying the full loss amount. Both methods aim to prevent the insured from profiting from the loss and ensure the indemnity does not exceed the actual loss suffered.

This question tests the understanding of an insurance intermediary’s role in preventing corruption and fraud, specifically referencing the ICAC’s initiatives and the ‘Practical Guide on Professional Ethics for Life Insurance Intermediaries’. The ICAC provides free, confidential services, including best practice packages and advice, to help organizations prevent corruption. For the insurance industry, they offer training and have collaborated on a guide to enhance ethical conduct and reduce regulatory violations. Therefore, actively engaging with these resources and adhering to their guidance is a proactive measure for intermediaries to uphold ethical standards and prevent illicit activities.

The question tests the understanding of ‘Composite Insurer’ as defined in the context of Hong Kong insurance regulations. A composite insurer is one that is authorized to conduct both long-term and general insurance business. The scenario describes an entity that has obtained licenses for both life insurance (a type of long-term business) and property insurance (a type of general business). Therefore, it fits the definition of a composite insurer.

The scenario describes an insurance agent handling sensitive customer information outside the traditional office environment. The core principle here is the protection of personal data. The guidance note emphasizes that agents should ensure customer data is not visible to unauthorized individuals and that private conversations are not overheard. This aligns with the need for data privacy and security, especially when dealing with personal information in public spaces. Option (a) directly addresses this by focusing on the agent’s responsibility to safeguard customer data during client interactions outside the workplace, which is a key aspect of responsible data handling in the insurance industry.

The Insurance Ordinance (Cap. 41) in Hong Kong categorizes insurance business into two primary divisions: General Business and Long Term Business. General Business encompasses a wide array of non-life insurance products, such as property, casualty, and marine insurance. Long Term Business, conversely, deals with insurance contracts that are expected to remain in force for extended periods, typically involving life insurance, annuities, and permanent health insurance. The distinction is crucial for regulatory purposes, including capital requirements and solvency margins, as the risk profiles and operational characteristics of these two categories differ significantly. Therefore, ‘Long Term Business’ is the correct counterpart to ‘General Business’ as defined by the Ordinance.

This question tests the understanding of reinsurance from the perspective of an insurer ceding risk. Outward reinsurance is when an insurer transfers a portion of its own risks to another insurer or reinsurer. This is a fundamental risk management technique for insurers to manage their exposure and capacity. Inward reinsurance, conversely, is when an insurer accepts risks from other insurers, acting as a reinsurer itself. The scenario describes an insurer seeking to reduce its potential payout on a large policy, which is achieved by transferring that risk outwards.