IIQE Paper 1 Principles and Practice of Insurance Examination Quiz 87

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. While the Insurance Claims Complaints Bureau and Panel deal with claims-related disputes, and the Insurance Ordinance provides the overarching regulatory framework for the industry, the IARB specifically focuses on the conduct and registration of agents.

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 can result in a payout greater than the indemnity value of the old item. Agreed value policies fix the value of the insured item at the outset of the policy. If the item is a total loss, 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 damaged property to its condition immediately before the loss, potentially at a higher cost than the depreciated value of the original item. The condition of average, however, is a limiting clause that reduces the payout proportionally if the sum insured is less than the value of the property, thus preventing over-indemnification, not causing it.

The Code of Practice for the Administration of Insurance Agents, issued by the HKFI with the approval of the Insurance Authority, defines various terms crucial for understanding the regulatory framework. An ‘Insurance Agent’ is broadly defined as a person who advises on or arranges insurance contracts as an agent or sub-agent of one or more insurers. This definition explicitly includes both individual natural persons acting as agents and entities operating as insurance agencies (sole proprietorships, partnerships, or corporations). However, the definition specifically excludes ‘Responsible Officers’ and ‘Technical Representatives’ from being considered ‘Insurance Agents’ themselves, as they function in specific capacities within an agency structure. Therefore, a natural person acting as an insurance agent, who is not registered as an insurance agency, falls under the definition of an ‘Individual Agent’ and is thus an ‘Insurance Agent’ for the purposes of the Code.

The Insurance Authority (IA) and the Industry and Regulatory Bodies (IARB) assess whether an individual is ‘fit and proper’ to be registered as an insurance intermediary. A key consideration is past compliance. If an individual has been found to have breached the Code of Conduct or the rules of the Hong Kong Federation of Insurers (HKFI), this directly impacts their fitness and propriety. Clause 6/31 (viii) explicitly states that a person not complying with or being in breach of the Code and/or HKFI rules is a factor the IARB may consider when determining fitness and propriety. Therefore, a past finding of non-compliance is a direct indicator of potential unsuitability.

The provided text outlines the obligations of an Insurance Agent concerning their Responsible Officers and Technical Representatives. Specifically, section 6.2.2(g)(i) states that a Responsible Officer or Technical Representative cannot act for more than one Insurance Agent at any given time. This is a crucial compliance requirement to ensure proper oversight and prevent conflicts of interest. Therefore, an Insurance Agent must ensure that any person appointed as a Responsible Officer or Technical Representative is not concurrently serving another Insurance Agent.

The Insurance Agents Code of Conduct, as outlined in the IIQE syllabus, emphasizes the importance of clear and accurate sales materials. This includes ensuring that all promotional content is up-to-date, factually correct, and presented in a manner that the public can easily understand, thereby preventing any misleading impressions. Option (b) is incorrect because while accuracy is crucial, the primary focus of the code regarding sales materials is on clarity and preventing misrepresentation. Option (c) is incorrect as the code does not mandate the inclusion of specific legal disclaimers in all sales materials, but rather emphasizes understandable language. Option (d) is incorrect because while customer service is important, the specific requirement for sales materials is about their content and presentation, not the availability of a dedicated customer service hotline.

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 standards and consumer protection within the insurance intermediary sector in Hong Kong. While other bodies like the Insurance Claims Complaints Bureau handle claims-related issues, the IARB’s mandate is specifically focused on the registration and conduct of agents.

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 for an individual whose name appears on a list of individuals associated with a designated terrorist organization. This directly triggers the FI’s obligation under the UNATMO to cease dealing with such property and to report the suspicion. The FI must not proceed with the transaction without explicit authorization from the Secretary for Security, as doing so would be a contravention of the ordinance. Therefore, the most appropriate action is to refuse the transaction and report the suspicion to the Joint Financial Intelligence Unit (JFIU).

The Insurance Ordinance (Cap. 41) mandates that any entity wishing to conduct insurance business in or from Hong Kong must first obtain authorization from the Insurance Authority (IA). This authorization process involves meeting specific minimum requirements set by the Ordinance, which include aspects like paid-up capital, solvency margin, the suitability of directors and controllers, and adequate reinsurance arrangements. The IA also issues Guidelines to further assess an applicant’s financial soundness and ongoing suitability. Therefore, the fundamental prerequisite for commencing insurance operations in Hong Kong is securing this formal authorization from the IA.

The scenario describes an individual acting as an insurance agent who also sells MPF schemes. According to the provided text, an insurance agent engaging in selling or advising on MPF schemes must also be registered as an MPF intermediary with the MPFA. This requirement is distinct from their insurance agent registration and ensures compliance with regulations governing both insurance and mandatory provident fund products. Therefore, the agent must hold both registrations to operate legally in both capacities.

This question tests the understanding of the fundamental principles of risk management and insurance, specifically the concept of ‘insurable risk’. An insurable risk must possess certain characteristics to be accepted by an insurer. These typically include being definite and measurable, accidental, not catastrophic, and having a large exposure base. The scenario describes a situation where a company is considering insuring its entire inventory against a single, large-scale event. While the loss might be measurable and accidental, the ‘catastrophic’ nature of a single event impacting the entire inventory makes it a high-risk proposition for an insurer, potentially violating the principle of not being catastrophic for the insurer. Therefore, it is less likely to be considered a standard insurable risk without specific underwriting considerations or higher premiums.

This question tests the understanding of ‘Non-fraudulent Non-Disclosure’ which is a breach of utmost good faith. This occurs when a party, without intent to deceive (innocently or negligently), fails to reveal material facts to the other party. The scenario describes an applicant for a travel insurance policy who, due to oversight rather than deliberate deception, fails to mention a pre-existing medical condition that is highly relevant to the insurer’s assessment of risk. This aligns with the definition of non-fraudulent non-disclosure, as the omission was not intended to mislead but was a failure to provide a material fact. Option B describes fraud, which involves intentional deception. Option C describes a breach of ordinary good faith, which typically involves lying or deliberate misleading in response to a direct question, not the proactive disclosure of all material facts. Option D describes a situation where the fact is not material, which is contrary to the scenario.

This question tests the understanding of the responsibilities of an authorized insurer concerning its members’ financial reporting and auditor reviews, as stipulated by relevant regulations. Specifically, it focuses on the insurer’s duty to ensure that its members submit their financial statements and auditor’s reports as per membership rules. Furthermore, it highlights the insurer’s obligation to review these auditor reports for any adverse statements or qualifications that are not duly noted in the insurer’s own report. This ensures transparency and adherence to financial standards within the membership.

The question tests the understanding of market concentration in Hong Kong’s insurance sector, specifically differentiating between General Business and Long Term Business. The provided text indicates that in General Business, the top ten insurers held a 42% market share, and no single insurer exceeded 17% in any major class. This suggests a more fragmented market. In contrast, for Long Term Business, the top ten insurers held 75% of the market, the top five held 55%, and the top one held 16%. This significantly higher concentration, particularly the substantial share held by the top few, points to a less evenly distributed market compared to General Business. Therefore, General Business is considered more evenly distributed among authorized insurers.

This question assesses the understanding of the role of an accountant within an insurance company, specifically focusing on the critical function of managing company assets. While record-keeping, collections, and payments are all vital accounting functions, the prompt highlights the accountant’s responsibility for the care and placement of company assets, particularly when a dedicated investment department is absent. This responsibility is paramount for ensuring the security of funds, achieving competitive returns, and maintaining sufficient liquidity to meet financial obligations, all of which are crucial for the insurer’s solvency and operational continuity. The other options represent important but distinct accounting functions that do not directly encompass the strategic management of company investments.

The Insurance Authority (IA) mandates that travel insurance agents, their responsible officers (ROs), and technical representatives (TRs) must complete 3 Continuing Professional Development (CPD) hours annually, starting from August 1, 2008. This requirement is crucial for maintaining their registration status. Failure to meet this requirement can lead to revocation of registration. Specifically, a first-time failure to meet CPD hours typically results in a 3-month revocation, with a requirement to complete outstanding hours upon re-registration. Making a false declaration regarding CPD hours carries a more severe penalty of a 12-month revocation, also requiring completion of outstanding hours. Non-response to requests for proof of compliance will also lead to revocation for a period determined by the Insurance Authority (IA), and future registration applications will not be processed without proof of compliance.

The Insurance Ordinance (Cap. 41) mandates that any entity wishing to conduct insurance business in or from Hong Kong must first obtain authorization from the Insurance Authority (IA). This authorization process involves meeting specific minimum requirements set by the Ordinance, which include aspects like paid-up capital, solvency margin, the suitability of directors and controllers, and adequate reinsurance arrangements. The IA also issues Guidelines to further assess an applicant’s financial soundness and ongoing suitability.

The question tests the understanding of how insurance companies perceive and manage risk. While risk management as a broader discipline involves identifying, quantifying, and dealing with both pure and speculative risks, insurance companies primarily focus on pure risks, which are risks with the potential for loss but no potential for gain. Furthermore, their internal risk management efforts are often concentrated on the risks they have already agreed to insure or are considering insuring, aiming to reduce the potential for losses associated with those specific risks. Therefore, when an insurer discusses ‘risk management,’ it is most likely in the context of managing the insured loss potential of risks they are underwriting.

The Insurance Ordinance in Hong Kong categorizes insurance business into Long Term Business and General Business. Long Term Business is further subdivided into various classes, including Life and Annuity (Class A), Marriage and Birth (Class B), Linked Long Term (Class C), Permanent Health (Class D), Tontines (Class E), Capital Redemption (Class F), and three categories for Retirement Scheme Management (Classes G, H, and I). General Business is divided into 17 classes, such as Accident, Sickness, Land Vehicles, Railway Rolling Stock, Aircraft, Ships, and Goods in Transit. Class F, Capital Redemption, is specifically defined as a contract to provide a capital sum at the end of a term to replace capital, and it is explicitly stated as not being related to human life. Therefore, a contract designed to provide a lump sum at a future date to repay a loan, without any connection to mortality or morbidity, falls under this classification.

The ‘single article limit’ in a household contents policy is a clause designed to manage the insurer’s risk when a single, highly valuable item constitutes a disproportionately large percentage of the total sum insured for all contents. If such an item is not specifically declared and insured for its individual value, the policy will cap the payout for that item to a predetermined amount, regardless of its actual market value at the time of loss. This prevents a situation where a single claim for one item could exhaust the majority of the policy’s coverage, which is a significant risk for the insurer, particularly concerning theft. The other options describe different policy features: ‘section limit’ applies to distinct sections of a policy (e.g., property damage vs. liability), ‘reinstatement insurance’ or ‘new for old’ cover means no depreciation is deducted, and ‘agreed value policies’ fix the sum insured based on expert valuation, typically for high-value items where depreciation is minimal or subjective.

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, as well as all income and expenses, and the broker’s assets and liabilities. The requirement to retain these records for at least seven years is a crucial aspect of regulatory compliance, ensuring accountability and the ability to investigate past activities if necessary. Therefore, the primary purpose of these record-keeping obligations is to ensure transparency, financial integrity, and auditability of the broker’s operations.

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 must explain the policy cover recommended to ensure the potential policyholder understands what they are purchasing. This includes clarifying the benefits, exclusions, and any limitations of the policy. Simply stating the policy is ‘comprehensive’ without detailing its specific provisions would not meet this requirement, as it lacks the necessary clarity for the policyholder to make an informed decision.

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 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 constitutes an ‘other means’ of ensuring compliance.

This question tests the understanding of how proximate cause applies when multiple perils are involved in a loss. According to the principles of proximate cause, if an uninsured peril (like negligence) leads to an insured peril (like fire), and that insured peril then causes the loss, the loss is generally covered. In this scenario, the master’s negligence (uninsured peril) caused a collision, which in turn caused a fire (insured peril under a fire policy). The fire then led to an explosion and subsequent water damage. The key is that the fire, an insured peril, was a direct and natural consequence of the initial negligence and directly led to the subsequent events causing the loss. Therefore, the loss is recoverable under the fire policy because the fire is considered the proximate cause, even though it was initiated by an uninsured peril.

The question tests the understanding of how salvage value impacts the indemnity provided by an insurer. 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 retain the salvaged item, or the insurer can take possession of the salvage and dispose of it, effectively covering the full loss. Option (a) correctly describes the scenario where the insurer pays the loss less the salvage value, and the insured keeps the damaged item. Option (b) is incorrect because it suggests the insurer pays the full loss and also keeps the salvage, which is a possible but not the only method of handling salvage. Option (c) is incorrect as it describes a situation where the salvage value is added to the payout, which is contrary to the principle of indemnity. Option (d) is incorrect because it implies the salvage value is ignored, which would lead to over-indemnification.

The Insurance Authority (IA) mandates that travel insurance agents, their responsible officers (ROs), and technical representatives (TRs) must complete 3 Continuing Professional Development (CPD) hours annually, starting from August 1, 2008. This requirement is crucial for maintaining their registration. Failure to meet this obligation can lead to consequences such as the revocation of registration for a specified period, with additional requirements for re-registration. The IA’s Guidance Note outlines the assessment and record-keeping responsibilities for all parties involved, including insurers and agents who have appointed TRs, to ensure compliance with these CPD mandates.

Guidance Note 6 (GN6) from the IARB clarifies the effective date of registration for insurance intermediaries. It explicitly states that no individual, including prospective or current insurance agents, Responsible Officers, or Technical Representatives, can act or present themselves as engaging in insurance agency business for a Principal before receiving written confirmation of their registration from the IARB. This confirmation is typically in the form of a Notice of Confirmation of Registration. Acting as an unregistered intermediary before this confirmation can lead to prosecution under Section 77 of the Insurance Ordinance. Therefore, the effective date of registration is the date specified by the IARB in this official confirmation notice.

The United Nations (Anti-Terrorism Measures) Ordinance (UNATMO) empowers the Secretary for Security to freeze assets suspected of being linked to terrorism. It is an offense to deal with such frozen property without a license. The ordinance also prohibits making property or financial services available to terrorists or their associates, or collecting property for them, except under a license. Contraventions of these provisions carry significant penalties, including imprisonment and fines. The scenario describes a financial institution (FI) receiving a directive to freeze assets based on a UNATMO notice. The FI’s obligation is to comply with this directive by ceasing all dealings with the specified property, unless a specific license is granted by the Secretary for Security to permit certain transactions. Therefore, the most appropriate action is to immediately cease all transactions involving the designated property.

Contribution between insurers applies when multiple policies cover the same loss. For contribution to be applicable, several conditions must be met. These include that each policy must provide an indemnity, cover the same interest affected, cover the same peril causing the loss, cover the same subject matter of insurance, and each policy must be liable for the loss (i.e., not subject to an exclusion that prevents contribution). In this scenario, while both policies cover the same property and the same peril (fire), they are insuring different interests: the owner’s interest in the building and the tenant’s interest in the improvements. Since the interests covered are different, contribution between the insurers will not apply. Therefore, each insurer is liable for the full amount of the loss they cover, up to their respective policy limits.

This question tests the understanding of how subrogation proceeds are shared when the recovery from a negligent third party exceeds the total loss incurred 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 then goes to the insured until they are made whole for their uninsured portion of the loss. In this scenario, the insurer paid $40,000. The recovery is $45,000. The insurer is fully reimbursed ($40,000). The remaining $5,000 from the recovery ($45,000 – $40,000) then goes to the insured, who bore the initial $10,000 loss (their excess). This aligns with the principle of making the insured whole without allowing them to profit from the loss.