IIQE Paper 1 Principles and Practice of Insurance Examination Quiz 86

The Insurance Agents Registration Regulation (Cap. 31 sub. leg. A) mandates that an insurance agent must be registered with the Insurance Authority (IA) to conduct regulated activities. This registration is a prerequisite for legally acting as an agent. While insurers have a responsibility to ensure their agents comply with laws and codes (as per the Code of Practice for the Administration of Insurance Agents), the primary legal requirement for an individual to operate as an insurance agent is their own registration with the IA. Therefore, an agent cannot legally solicit insurance business without this registration, regardless of the insurer’s internal oversight.

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 their clients. Failure to do so, leading to a client’s loss, can constitute professional negligence. In such cases, the client has the right to seek compensation from the broker. To mitigate the financial risks associated with such claims, insurance brokers are mandated by regulations to maintain Professional Indemnity Insurance. This insurance specifically covers liabilities arising from errors or omissions in the professional services provided.

Non-fraudulent non-disclosure, a concept central to the principle of utmost good faith in insurance contracts, occurs when a party, without intent to deceive, fails to reveal material facts. This is distinct from fraudulent misrepresentation, which involves deliberate deception. In the context of insurance, the insured has a duty to disclose all material facts that could influence the insurer’s decision to accept the risk or determine the premium. A failure to do so, even if unintentional or due to negligence, can still render the policy voidable by the insurer because it breaches the duty of utmost good faith. The question tests the understanding of this specific type of breach, differentiating it from deliberate deceit.

Principle 6 of the Personal Data (Privacy) Ordinance grants data subjects the right to access and correct their personal data. This means an individual can request a copy of the information an insurance company holds about them, and if they find it inaccurate, they can ask for it to be corrected. This is a fundamental right to ensure the accuracy and integrity of personal data held by organizations.

Subrogation allows an insurer, after paying a claim, to step into the shoes of the insured and pursue any rights the insured may have against a third party responsible for the loss. This principle is rooted in the concept of indemnity, ensuring the insured is made whole and preventing unjust enrichment. The insurer’s recovery is limited to the amount it paid out as indemnity. Therefore, if the insured has already recovered a portion of the loss from the responsible third party before the insurer pays, the insurer’s subrogation rights would be reduced accordingly. The question tests the understanding that subrogation is a right of recovery for the insurer, not an additional benefit, and its extent is tied to the indemnity provided.

The Insurance Authority (IA) mandates that insurance brokers must submit annual audited financial statements and an auditor’s report within six months of their financial year-end. This auditor’s report specifically confirms adherence to minimum regulatory requirements, including those related to financial soundness and operational capabilities. While the broker must also disclose their registration number upon request and on business cards, and provide a Customer Protection Declaration for new long-term policies, these are separate obligations from the annual financial reporting and auditor’s confirmation of compliance with minimum requirements.

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 item’s value could effectively exhaust the entire sum insured, leaving other contents underinsured and exposing the insurer to a concentrated risk, particularly concerning theft. The insured has the option to declare such valuable items separately to ensure they are covered up to their full declared value.

The Employees’ Compensation Insurance Residual Scheme Bureau (ECIRS Bureau) was established to address situations where employers, particularly those with employees in high-risk occupations, faced difficulties in securing mandatory employees’ compensation insurance. It functions as a market of last resort, ensuring that such employers can obtain the necessary coverage. This is achieved through a market agreement where all insurers underwriting employees’ compensation business in Hong Kong are required to be members of the ECIRS and collectively share the associated risks. The Bureau oversees the operation of this scheme, fulfilling its purpose of providing a safety net for employers unable to obtain this essential insurance through the standard market.

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 significant concentration, particularly the higher market share of the top players and the combined share of the top five, points to a less evenly distributed market compared to General Business. Therefore, General Business is more evenly distributed among authorized insurers.

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.

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.

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 there isn’t a dedicated investment department. This responsibility is paramount for ensuring the insurer’s financial stability through security, yield, and liquidity, directly impacting its ability to meet financial obligations.

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 primary function of insurance as a risk transfer mechanism. While insurance does contribute to employment, financial services, and economic development, its core purpose is to shift the potential financial burden of a loss from an individual or entity to an insurer in exchange for a premium. The other options represent ancillary benefits or broader economic impacts, not the fundamental role of insurance.

Participating policies, also known as with-profit policies, offer policyholders a share in the profits of the insurance company. These profits are typically distributed in the form of bonuses. The question asks about the primary mechanism for distributing these profits to policyholders. While dividends are a form of profit distribution, in the context of participating life insurance, the term ‘bonus’ is specifically used to denote the share of profits allocated to policyholders. These bonuses can be paid in various forms, such as cash, reversionary additions to the sum assured, or used to reduce premiums. Therefore, bonuses are the direct manifestation of profit sharing in participating policies.

The scenario describes a situation where a customer is seeking clarification on policy terms and requesting a duplicate document. According to the provided syllabus, the Customer Servicing department is responsible for handling various types of enquiries, including those seeking guidance and information, as well as requests for documentation like duplicate policies. While public relations and marketing are also mentioned, they focus on broader company image and external communications, not direct customer requests for policy-related information or documents. Complaints handling is a separate function, though it may involve liaison with other departments. Therefore, the primary responsibility for addressing this customer’s needs falls under the Customer Servicing department.

Renewal of an insurance contract signifies the continuation of the existing coverage for an additional period. Legally, this is considered the establishment of a new contract, even though it often involves the same terms and conditions as the previous one. This process is distinct from replacement, which involves substituting a damaged or lost item with a new one. Reporting requirements are obligations to submit financial statements to the Insurance Authority. Reserves are amounts set aside for future liabilities. A Responsible Officer oversees agency conduct. Revocation refers to the cancellation of an agreement. Risk is uncertainty of loss. Risk avoidance is eliminating exposure to a peril. Risk financing involves strategies to mitigate the financial impact of losses. Risk management, as applied by insurers, focuses on improving the loss potential of insured risks, while in other financial areas, it pertains to controlling speculative risks and managing all types of risk.

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. The FI’s primary obligation under the UNATMO, in this context, is to comply with the directive by ceasing all dealings with the frozen assets unless specifically authorized by a license from the Secretary for Security. This aligns with the core purpose of the ordinance, which is to disrupt terrorist financing.

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 item. 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 loss, again exceeding strict indemnity. Reinstatement insurance allows the insured to repair or replace the lost or damaged property to its condition immediately before the loss, often with new materials. This can also result in a payout exceeding the depreciated value of the original item. The condition of average, conversely, is a clause designed to prevent underinsurance by ensuring that the payout is proportionate to the sum insured relative to the actual value of the property. If the property is underinsured, the claim payment is reduced proportionally, thus enforcing indemnity rather than exceeding it.

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 ensures compliance with regulations governing both insurance and mandatory provident fund products, demonstrating a comprehensive understanding of the regulatory landscape for financial advisors.

A registered person selling long-term insurance must make reasonable efforts to ensure the policy aligns with the client’s disclosed needs and financial capacity. This includes understanding the client’s situation and recommending a suitable product, rather than pushing any available policy. The other options describe actions that are either not explicitly required or are potentially misleading. Offering a rebate not specified in the policy is prohibited, and while explaining differences is important, it’s secondary to ensuring suitability. Focusing solely on favorable aspects of an illustration is also a prohibited practice.

The question tests the understanding of how policy wording can modify the application of proximate cause. The phrase ‘directly or indirectly’ in an exclusion clause, as illustrated by the case of the army officer killed by a train during wartime, means that the insurer is not liable even if the excluded peril (war) was only a remote or indirect cause of the loss. This broadens the exclusion beyond what ‘proximate cause’ alone might imply. Therefore, a loss where the excluded peril is a contributing factor, however minor or indirect, would be denied coverage under such wording.

This scenario tests the understanding of an agent’s duty of due care and skill. While an agent is expected to act with reasonable diligence, the law does not demand perfection. If an agent’s actions, even if not perfectly executed, are within the bounds of reasonable skill and diligence for their role, the principal is generally bound by those actions. However, if the principal suffers a loss due to the agent’s demonstrable lack of care or skill, the principal may have a right to seek recourse from the agent. In this case, the agent’s failure to secure the correct policy, while a mistake, is presented as a lapse in diligence rather than a complete disregard for their responsibilities. The principal is bound by the policy obtained, but can potentially claim damages from the agent for the financial loss incurred due to the agent’s oversight, assuming the oversight falls below the standard of reasonable care expected.

The Insurance Authority (IA) mandates specific criteria for individuals and entities seeking to operate as insurance brokers in Hong Kong. One fundamental requirement is that these individuals or entities must either be directly authorized by the IA or be a member of an approved body of insurance brokers. This ensures a regulated framework for the industry. The question tests the understanding of these two primary pathways to legally operate as an insurance broker, as stipulated by the relevant regulations.

This question tests the understanding of ‘Non-fraudulent Non-Disclosure’ as a breach of utmost good faith. It arises when a party, without intent to deceive, fails to reveal material facts. The scenario describes an applicant for travel insurance who omits mentioning a pre-existing medical condition that is not life-threatening but could affect the insurer’s assessment of risk. This omission, even if unintentional, is a failure to disclose a material fact, which is the core of non-fraudulent non-disclosure. Option B describes ‘Ordinary Good Faith,’ which only requires disclosure in response to specific questions, not proactive disclosure of all material facts. Option C describes ‘Utmost Good Faith’ generally, but the scenario specifically points to a non-fraudulent breach. Option D describes ‘Proximate Cause,’ which relates to the direct cause of loss, not disclosure obligations.

The principle of legality in contract law dictates that an agreement must not be contrary to any aspect of the law to be enforceable. This means that the purpose and subject matter of the contract must be legal. If a contract’s objective is to perform an illegal act, such as engaging in prohibited gambling or violating specific Hong Kong ordinances, it is considered void and unenforceable from its inception. This is a fundamental requirement for any valid contract, ensuring that the legal system does not uphold agreements that contravene public policy or statutory provisions. Therefore, a contract for the sale of counterfeit goods, which is illegal under intellectual property laws, would be unenforceable due to its illegality.

Insurable interest is a fundamental principle in insurance, requiring the policyholder to have a legitimate financial stake in the subject matter of the insurance. This interest must exist at the time of the loss for indemnity insurance, but for life insurance, it is only required at the policy’s inception. A property management company, acting as an agent for building owners, can secure insurance for the building. While the property management company itself might not have direct ownership, its contractual authority and responsibility to manage and protect the property on behalf of the owners grants it a form of insurable interest derived from the principal’s interest. This allows the agent to insure the property, and the policy remains valid even if the agent’s direct financial loss is not immediately apparent, as long as the principal (the owner) has insurable interest and the agent is authorized. Therefore, the property management company can insure the building under its authority from the owners.

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 and evaluating new insurance products or modifications to existing ones. This involves analyzing market trends, competitor offerings, and customer needs to ensure the insurer’s portfolio remains competitive and relevant. Developing new forms of cover, whether as standalone products or as part of a package, is a direct outcome of effective product research and development, aligning with the goal of staying competitive and meeting evolving market demands.

The Insurance Authority (IA) is responsible for overseeing the conduct of insurance intermediaries. When an applicant for registration as a Registered Person is undergoing the approval process, the appointing Principal or Insurance Agent has a duty to inform the IA of any changes in the applicant’s circumstances that might influence the IA’s decision. This proactive disclosure is crucial for maintaining the integrity of the registration process and ensuring that only fit and proper individuals are registered. Failure to provide such information could lead to the application being rejected or, if registered, potential disciplinary action.

The question tests the understanding of how insurers internally classify their business operations. While regulatory classifications exist (like Classes 8-17), insurers often adopt practical classifications for management. The ‘Source of Business’ approach categorizes business based on how it was acquired, such as through agents, brokers, or directly from the public. This method is crucial for managing distribution channels and assessing the effectiveness of different sales strategies. Classifying by ‘Departmental (Class of Business)’ refers to the types of insurance products offered, ‘Type of Client’ categorizes based on whether the client is an individual or a firm, and ‘Academic Classification’ is primarily for educational and examination purposes, focusing on the subject matter or function of insurance.