IIQE Paper 1 Principles and Practice of Insurance Examination Quiz 85

Guidance Note 6 (GN6) explicitly states that no individual, whether a prospective or current insurance agent, Responsible Officer, or Technical Representative, should present themselves as conducting insurance agency business for a Principal before receiving written confirmation of their registration from the IARB. Acting or holding oneself out as an insurance agent before the effective date specified in the Notice of Confirmation of Registration constitutes an offence under Section 77 of the Insurance Ordinance. Similarly, for Responsible Officers and Technical Representatives, acting in such a capacity before their registration date is a breach of the Code, potentially impacting their fitness and properness. Therefore, the confirmation of registration by the IARB is the critical trigger for commencing these activities.

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, facts already known to the insurer, and facts that diminish the risk do not need to be disclosed in the absence of inquiry, the fact that a proposer has a pre-existing, serious medical condition like an inoperable malignant brain tumour would undoubtedly influence a prudent insurer’s decision to accept the risk and would therefore be considered a material fact requiring disclosure. The other options represent situations that are either common knowledge, already known to the insurer, or would reduce the risk, thus not requiring disclosure.

The Insurance Agents Registration Regulation (Cap. 31 sub. leg. R) mandates that an insurer must ensure that its appointed insurance agents are registered with the Insurance Authority. This registration is a prerequisite for legally conducting insurance business. While insurers have a responsibility to provide training and ensure compliance with codes of conduct, the fundamental requirement for an agent to be legally authorized to act is their registration. Therefore, an insurer’s primary obligation regarding an agent’s ability to solicit business is to confirm their valid registration.

An insurance broker has a fundamental duty to act in the best interests of their clients. This principle is paramount and dictates that the client’s needs and welfare should take precedence over any other considerations, including the broker’s own potential benefits or relationships with insurers. Limiting a client’s choices of insurers without a valid reason would be a direct contravention 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.

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 travel insurance who, due to oversight rather than deliberate deception, omits information about a pre-existing medical condition that is relevant to the policy. This omission, even if unintentional, constitutes a breach of the duty of utmost good faith, as it involves the failure to disclose a material fact. Option B describes ‘Ordinary Good Faith’, which only requires truthful answers to direct questions, not proactive disclosure of all known facts. Option C describes a situation of fraud, which involves intentional deception. Option D describes a policy limit, which is a contractual term defining the maximum payout, unrelated to disclosure obligations.

This question tests the understanding of how proximate cause applies in a chain of events involving different types of perils. The scenario describes a sequence: negligence (uninsured peril) leading to collision (insured peril under a marine policy), which causes fire (insured peril), leading to explosion (insured peril), resulting in leaks and water damage (uninsured peril). According to the principles of proximate cause, when an uninsured peril initiates a chain that includes insured perils, and the ultimate loss is a consequence of that chain, the loss is generally recoverable if the proximate cause that directly led to the loss is an insured peril. In this case, while negligence started the chain, the direct causes of the leaks and subsequent water damage were the fire and explosion, which are insured perils. Therefore, the loss is recoverable under policies covering fire and explosion, even though the initial cause was negligence.

The Personal Data (Privacy) Ordinance (PDPO) in Hong Kong mandates that when a data user intends to use personal data for direct marketing, they must provide specific prescribed information to the data subject. This information includes the types of personal data to be used, the categories of marketing subjects, and, if applicable, the classes of persons to whom the data will be provided for direct marketing. Crucially, if the data is provided to others for gain, the data user must also inform the data subject of this fact. The information must be presented in an easily readable and understandable format. The question tests the understanding of the specific information that must be disclosed to the data subject before their data can be used or provided for direct marketing purposes, as stipulated by the PDPO.

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 Authority (IA) is responsible for ensuring that individuals appointed as registered persons are fit and proper. When an applicant is undergoing the registration process, the appointing Principal or Insurance Agent has a duty to inform the IA of any changes in the applicant’s circumstances that might affect the IA’s assessment. This proactive disclosure is crucial for maintaining the integrity of the registration system. Failure to provide such information, or providing incomplete information, can lead to the IA not considering the application. Therefore, the appointing Principal or agent must promptly notify the IA of any relevant changes.

The core of underwriting in general insurance involves a dynamic process of risk selection and terms determination. Unlike life insurance, where underwriting is largely a one-time event for individual policies, general insurance policies are subject to renewal. This renewal period allows the insurer to re-evaluate the risk, adjust terms, or even decline renewal based on the policyholder’s claims history and evolving risk factors. Therefore, the ability to modify or terminate coverage at renewal is a key characteristic that distinguishes general insurance underwriting from life insurance underwriting.

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 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 meeting minimum requirements.

The scenario describes an insurance agent who is also licensed as a travel agent and wishes to engage in restricted scope travel insurance business. According to the provided text, an insurance agent engaging in restricted scope travel business must be licensed as a travel agent under the Travel Agents Ordinance. This requirement is explicitly stated in section 6.2.2(f)(x) of the Code. Therefore, the agent must possess this additional license to legally operate in this specific capacity.

The Insurance Agents Registration Board (IARB) plays a crucial role in the regulation of insurance intermediaries in Hong Kong. According to the provided text, the IARB has the authority to investigate matters related to registration applications, renewals, and complaints against registered persons. It can also refer these matters for investigation by principals or registered persons, receive investigation reports, and require disciplinary action. Furthermore, the IARB is responsible for registering and revoking the registration of Insurance Agents, Responsible Officers, and Technical Representatives. Finally, it is mandated to report breaches of the Insurance Ordinance or the Code, or instances where a registered person is no longer deemed fit and proper, to the Insurance Authority (IA). Therefore, all these functions fall within the purview of the IARB’s responsibilities.

The Insurance Authority (IA) mandates that individuals seeking to be registered as insurance intermediaries must demonstrate a commitment to ongoing professional development. This requirement is outlined in the Code of Conduct for Persons Licensed by the IA. Specifically, clause 6/32(d)(iii) states that all Registered Persons must comply with the Continuing Professional Development (CPD) Programme requirements as specified by the IA. Failure to adhere to these CPD requirements can lead to a person being considered not fit and proper, impacting their registration status. Therefore, an individual who has not fulfilled the IA’s CPD obligations would be deemed to be in breach of the Code.

The scenario highlights a situation where a Hong Kong-incorporated financial institution (FI) has an overseas subsidiary that cannot comply with Hong Kong’s Customer Due Diligence (CDD) and record-keeping requirements due to local legal prohibitions. According to the provided guidelines, when an overseas branch or subsidiary is unable to comply with requirements similar to those in Parts 2 and 3 of Schedule 2 of the relevant ordinance because local laws prevent it, the FI has two primary obligations. First, it must inform its relevant authority (RA) about this non-compliance. Second, and crucially, it must implement additional measures to effectively mitigate the Anti-Money Laundering and Counter-Terrorist Financing (AML/CFT) risks that arise from this inability to adhere to the stipulated Hong Kong standards. This ensures that even with local legal constraints, the FI actively manages and reduces the potential for money laundering or terrorist financing.

The question tests the understanding of how salvage value impacts the indemnity provided by an insurer. When damaged property has residual value (salvage), the insurer’s liability is reduced by this value. The insured can either keep the salvage and receive a reduced payout, or the insurer can take possession of the salvage and pay the full loss. In this scenario, the damaged vehicle has a salvage value of $5,000. The total repair cost is $20,000. The insurer’s liability is the repair cost minus the salvage value, which is $20,000 – $5,000 = $15,000. This amount represents the indemnity provided by the insurer, as the insured is restored to their pre-loss financial position, considering the residual value of the damaged asset.

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, 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.

The Insurance Ordinance strictly prohibits an individual from simultaneously acting as both an appointed insurance agent and an authorised insurance broker. This is to prevent conflicts of interest and maintain clear lines of responsibility within the insurance industry. Therefore, if an individual is an appointed insurance agent for Company A, they cannot also be an authorised insurance broker for Company B, even if the clients are different. The prohibition applies regardless of whether the clients are the same or different.

The Code of Practice for the Administration of Insurance Agents, issued by the HKFI with the approval of the Insurance Authority, defines an ‘Insurance Agent’ as a person who holds themselves out to advise on or arrange contracts of insurance in or from Hong Kong 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). It also clarifies that the term does not encompass Responsible Officers or Technical Representatives, who are defined separately in relation to the agency structure.

This question tests the understanding of the core functions within an insurance company and the division of responsibilities. The Accounts department is primarily concerned with financial transactions, record-keeping, and managing the company’s monetary inflows and outflows. Determining the insurability of a risk falls under the purview of underwriting, which involves assessing and evaluating potential risks to decide whether to accept them and on what terms. Arranging the launch of a new policy product is a strategic and marketing function, typically handled by product development, marketing, or business development teams. Therefore, both determining risk insurability and arranging new product launches are outside the typical responsibilities of an Accounts department.

This question tests the understanding of the core functions within an insurance company and the division of responsibilities. The Accounts department is primarily concerned with financial transactions, record-keeping, and managing the monetary aspects of the business. Determining the insurability of a risk falls under the purview of underwriting, which involves assessing and evaluating potential risks to decide whether to accept them and on what terms. Arranging the launch of a new policy product is a strategic and marketing function, typically handled by product development, marketing, or new business teams, not the accounts department. Therefore, both determining risk insurability and arranging new product launches are outside the typical responsibilities of an accounts department.

The Anti-Money Laundering and Counter-Terrorist Financing Ordinance (AMLO) imposes specific obligations on Financial Institutions (FIs) to prevent money laundering and terrorist financing. Section 23 of Schedule 2 of the AMLO mandates that FIs must implement robust safeguards to ensure compliance with Parts 2 and 3 of Schedule 2 and to effectively mitigate money laundering and terrorist financing risks. Failure to do so, particularly if an FI knowingly contravenes a specified provision, can lead to criminal penalties, including imprisonment and fines. Disciplinary actions by Relevant Authorities (RAs) can also be imposed, which may include pecuniary penalties. Therefore, a financial institution must proactively establish and maintain comprehensive internal controls and procedures to meet these regulatory requirements and manage associated risks.

The scenario highlights a situation where a customer is dissatisfied with a policy amendment, which falls under the purview of customer servicing. Specifically, handling customer complaints and ensuring they are addressed fairly and promptly is a core responsibility of this department. While marketing and public relations are important for a company’s image, and documentation is a procedural task, the immediate need to resolve a customer’s grievance about a policy change is a direct customer service function. The prompt mentions that complaints may require liaison with other departments, reinforcing the idea that customer service often acts as a central point for resolving client issues.

The United Nations (Anti-Terrorism Measures) Ordinance (UNATMO) aims to prevent the financing of terrorist acts by criminalizing the provision or collection of property, or making property or financial services available to terrorists or their associates. A key element of compliance and a statutory defence against these offences is the timely and proper reporting of suspicions to the Joint Financial Intelligence Unit (JFIU). Failing to report such suspicions, or ‘tipping off’ someone that a report has been made, are themselves offences under the UNATMO. Therefore, an employee who reports their suspicion to the designated person within their organisation, following established internal procedures, has fulfilled their statutory obligation regarding that specific suspicion.

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.

This question tests the understanding of subrogation, specifically how it operates when an insurer has only partially indemnified a loss due to policy limitations. According to the principles of subrogation, if an insurer pays only a portion of the loss (e.g., due to a deductible or a policy limit), and the insured recovers an amount from a third party that covers the entire loss, the insurer is entitled to a portion of that recovery. This portion is typically proportional to the insurer’s contribution to the loss. The insured, having borne a part of the loss themselves, retains the right to any recovery that exceeds the total amount paid by the insurer and the insured’s own contribution. Therefore, the insurer can only recover up to the amount they have paid, and any excess belongs to the insured, unless the policy specifies otherwise or the loss was subject to abandonment.

The Anti-Money Laundering and Counter-Terrorist Financing Ordinance (AMLO) imposes specific obligations on Financial Institutions (FIs) to prevent money laundering and terrorist financing. Section 23 of Schedule 2 of the AMLO mandates that FIs must implement robust safeguards to ensure compliance with Parts 2 and 3 of Schedule 2 and to effectively mitigate money laundering and terrorist financing risks. Failure to do so, particularly if an FI knowingly contravenes a specified provision, can lead to criminal penalties, including imprisonment and fines. Disciplinary actions by Relevant Authorities (RAs) can also be taken, which may include pecuniary penalties. Therefore, a financial institution must proactively establish and maintain adequate internal controls and procedures to meet these regulatory requirements and manage associated risks.

The scenario describes a situation where a registered person is advising a potential policyholder. According to the regulations for the conduct of registered persons, specifically concerning general insurance business, a registered person must ensure they are competent to provide advice or seek assistance from their principal or appointing insurance agent when necessary. This directly addresses the requirement to only offer advice within one’s expertise or to obtain support when needed, ensuring the policyholder receives accurate and appropriate guidance. Option B is incorrect because while explaining policy coverage is important, it’s secondary to ensuring the advice itself is sound. Option C is incorrect as disclosing the registration number is a separate requirement and not directly related to the competency of advice. Option D is incorrect because while treating information confidentially is crucial, it doesn’t address the core issue of the registered person’s ability to provide competent advice.

The Insurance Claims Complaints Bureau (ICCB) is a key external dispute resolution body for policyholders in Hong Kong. Its panel is empowered to make awards against insurers. The maximum award amount is HK$800,000. Importantly, insurers cannot appeal an award made by the panel. However, a complainant who is dissatisfied with an award has the option to pursue legal recourse. This structure ensures a degree of finality for the insurer regarding the ICCB’s decision while preserving the complainant’s right to seek further legal remedies if they deem the award insufficient.

This question tests the understanding of how an agency agreement is terminated due to a fundamental breach by one of the parties. According to agency law principles, if either the principal or the agent commits a significant violation of the contract’s terms, the non-breaching party has the right to consider the agreement terminated. This termination can be immediate, and the aggrieved party may also seek compensation for any losses incurred due to the breach, such as lost profits. The scenario describes a situation where an exclusive agent discovers the principal has appointed another agent before the agreed-upon term, which constitutes a fundamental breach of the exclusivity clause. Therefore, the agent is entitled to end their performance and claim damages.