IIQE Paper 1 Principles and Practice of Insurance Examination Quiz 84

The question tests the understanding of the minimum net asset requirements for an incorporated insurance broker. According to the regulations, an incorporated insurance broker must maintain a minimum net asset value of HK$100,000 and a minimum paid-up share capital of HK$100,000 at all times. Option A correctly states these requirements. Option B is incorrect because it only mentions net assets and not paid-up share capital. Option C is incorrect as it suggests a lower net asset requirement and no paid-up capital requirement. Option D is incorrect because it proposes higher figures for both net assets and paid-up capital than stipulated.

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 directly aligns with the definition of outward reinsurance.

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 providing 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, it’s one aspect of the required records, not the sole purpose. Option C is incorrect as the primary focus is on the accuracy and completeness of transactions and financial position, not solely on client communication logs. Option D is incorrect because while auditability is a requirement, it’s a consequence of having sufficiently detailed and accurate records, not the primary objective of the record-keeping itself.

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.

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.

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. Arranging the launch of a new policy product is typically the responsibility of the product development or marketing departments, which focus on strategy, design, and promotion. Therefore, both determining risk insurability and arranging new product launches are outside the typical scope of an Accounts department.

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.

This question tests the understanding of the Insurance Authority’s (IA) oversight responsibilities concerning the financial health and compliance of licensed entities, specifically focusing on the requirements for receiving and reviewing financial statements and auditor’s reports from members. The IA mandates that licensed entities must ensure their members submit these documents as per membership rules. Furthermore, the IA requires a review of all auditor reports on members’ financial statements and minimum requirements. The critical aspect is identifying any adverse statements or qualifications within these reports. The IA’s role is to be informed of any such issues, which are then to be listed in the reviewing entity’s own report to the IA. This ensures transparency and allows the IA to monitor potential risks or non-compliance across the industry.

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 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, brokers must keep detailed records of all transactions involving insurers, clients, and themselves, as well as all income and expenses, and their assets and liabilities. These records are required to be retained for a minimum of seven years. Therefore, the primary purpose of these record-keeping requirements is to ensure transparency, accountability, and the ability to verify the financial health and operational integrity of the brokerage business.

The scenario highlights the responsibility of insurance agents to protect customer data when conducting business outside the traditional office environment. The Personal Data (Privacy) Ordinance (PDPO) in Hong Kong mandates that data users take all practicable steps to ensure that personal data is protected from unauthorized access, processing, or disclosure. This includes being mindful of the surroundings when discussing sensitive information or handling documents containing personal details. Therefore, an agent must ensure that conversations are not overheard and documents are not visible to unauthorized individuals to comply with the PDPO’s requirements for data security.

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 agent must ensure that this data is not exposed to unauthorized individuals. This aligns with the guidance provided for insurance agents working remotely or in public, emphasizing the need to safeguard customer privacy. Option (b) is incorrect because while maintaining professionalism is important, it doesn’t directly address the data protection aspect. Option (c) is incorrect as the focus is on preventing unauthorized access to data, not necessarily on the agent’s personal financial gain. Option (d) is incorrect because while customer trust is vital, the primary concern in this situation is the secure handling of personal data as mandated by regulations.

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 data accuracy and transparency. Options B, C, and D describe actions related to data processing or security, but not the specific right of a data subject to view and amend their own information.

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 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 full loss, the insurer is entitled to recover its payment. However, the insured retains any amount recovered that exceeds the insurer’s payout and their own uninsured portion of the loss. In this scenario, the insurer paid HK$50,000 of a HK$80,000 loss. The third party’s recovery is HK$70,000. The insurer’s subrogation right is limited to the amount it paid, which is HK$50,000. The remaining HK$20,000 (HK$70,000 recovery – HK$50,000 insurer’s payout) belongs to the insured, as it covers the remaining portion of their loss (HK$80,000 total loss – HK$50,000 insurer’s payout = HK$30,000 uninsured portion). Therefore, the insurer can claim HK$50,000 from the third party, and the insured is entitled to the remaining HK$20,000.

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 Mr. Chan is an appointed insurance agent for ‘SecureLife Insurance’, he cannot also be an authorised insurance broker for ‘GlobalRisk Brokers’, regardless of whether he is advising the same or different clients. The prohibition applies to the roles themselves, not just the client base.

This question tests the understanding of an insurance intermediary’s role in preventing corruption and fraud, specifically concerning their interaction with clients and third parties. The provided text emphasizes that intermediaries must guard against violating the relevant Ordinance when dealing with clients or other third parties. The ICAC’s ‘Practical Guide on Professional Ethics for Life Insurance Intermediaries’ and best practices, including those on verifying insurance claims, are highlighted as resources to enhance vigilance against corruption and fraud. Therefore, actively ensuring that clients understand the ethical implications of their insurance applications and transactions, and verifying the accuracy of information provided, are crucial preventative measures. Option A correctly identifies this proactive approach to client interaction and information verification as a key responsibility. Option B is incorrect because while reporting corruption is important, it’s a reactive measure, not the primary preventative action in client dealings. Option C is too narrow, focusing only on internal company policies without addressing external client interactions. Option D is incorrect as it suggests a passive approach of merely being aware, rather than actively preventing potential misconduct.

The principle of insurable interest is fundamental to the validity of an insurance contract. It requires the policyholder to have a legally recognized financial stake in the subject matter of the insurance. This means that the policyholder must stand to suffer a direct financial loss if the insured event occurs. For instance, a person has an insurable interest in their own life, their spouse’s life (often presumed), and property they own. A creditor generally has an insurable interest in the life of their debtor, but not necessarily in the debtor’s property unless it’s collateral. The scenario describes a situation where a person has a financial relationship with a property but no legal claim or ownership over it. Therefore, they lack the legally recognized relationship required for insurable interest.

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 assets and liabilities. Determining the insurability of a risk falls under the purview of underwriting, which involves assessing the likelihood and potential cost of a loss. Arranging the launch of a new policy product is a strategic and marketing function, typically handled by product development, marketing, or actuarial departments, not the accounts department. Therefore, both determining risk insurability and arranging new product launches are outside the typical responsibilities of an accounts department.

The Insurance Authority (IA) has the power to impose further disciplinary or other actions on a Principal or Registered Person, including the respondent’s appointing insurance agent, if they fail to comply with a requirement to take disciplinary or other action. This is a direct consequence outlined in the regulatory framework for insurance intermediaries, emphasizing accountability within the industry. The IA’s role is to ensure compliance and maintain professional standards, and this power allows them to enforce such requirements effectively.

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 agent must ensure that this data is not exposed to unauthorized individuals. This aligns with the guidance provided for insurance agents working remotely or in public, emphasizing the need to safeguard customer privacy. Option (b) is incorrect because while maintaining professional conduct is important, it doesn’t directly address the data protection aspect. Option (c) is irrelevant to the immediate situation of data handling. Option (d) is also incorrect as the focus is on preventing unauthorized access to data, not on the general process of policy issuance.

The provided text outlines the requirements for an Insurance Agent to be registered and to maintain their registration. Specifically, section 6.2.2(f)(x) mandates that an Insurance Agent engaging in Restricted Scope Travel Business must be licensed as a travel agent under the Travel Agents Ordinance. This is a prerequisite for operating in that specific business scope. The other options are either general compliance requirements (complying with the Code), related to other roles (Responsible Officer), or not directly tied to the specific licensing requirement for travel business.

The Insurance Authority (IA) mandates specific criteria for individuals and bodies seeking to operate as insurance brokers in Hong Kong. To be authorized, an individual or a body must either obtain direct authorization from the IA or become a member of an IA-approved body of insurance brokers. This ensures a regulated framework for the insurance broking industry, promoting professionalism and adherence to standards. The IA sets minimum requirements covering qualifications, experience, financial stability, professional indemnity insurance, and client fund management, all aimed at safeguarding policyholders’ interests.

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 under subrogation is limited to the amount it paid out in indemnity. Therefore, if the insured has already recovered a portion of their loss from another source, the insurer’s subrogation rights are reduced accordingly. Option B is incorrect because subrogation arises from the insurer indemnifying the insured, not from a direct contractual relationship with the third party. Option C is incorrect as the insurer’s right to subrogate is limited to the indemnity paid, not the total loss suffered by the insured. Option D is incorrect because while subrogation can arise from tort, it is not exclusively limited to tortious actions; it can also stem from contract, statute, or salvage.

The question tests the understanding of how salvage value affects the indemnity provided by an insurance policy. When damaged property has a residual value after a loss, this value is factored into the calculation of the payout. The insurer can either deduct the salvage value from the claim amount, allowing the insured to retain the damaged property, or the insurer can take possession of the salvage and pay the full claim. In this scenario, the insurer chose the latter, meaning they paid the full repair cost and then benefited from selling the salvaged vehicle. Therefore, the $5,000 received from selling the salvaged car reduces the net cost of the loss to the insurer.

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 IA, with future registration contingent on providing proof of compliance.

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. The other options describe different aspects of insurance operations or regulatory functions that are not directly related to the definition and purpose of these approved bodies.

The Insurance Ordinance strictly prohibits an individual from simultaneously holding the roles of an appointed insurance agent and an authorised insurance broker. This is to prevent potential conflicts of interest and ensure clear lines of responsibility within the insurance industry. Therefore, if Mr. Chan is an appointed insurance agent for “SecureLife Insurance”, he cannot simultaneously be an authorised insurance broker for “Global Risk Solutions”, regardless of whether they are serving the same or different clients.

This question tests the understanding of how proximate cause operates in insurance when multiple perils are involved, specifically focusing on the relationship between insured and uninsured perils in a chain of events. According to the principle of proximate cause, if an uninsured peril leads to an insured peril, and the insured peril then causes the loss, the loss is generally recoverable. In this scenario, the master’s negligence (an uninsured peril) directly led to the collision, which in turn caused a fire (an insured peril). The fire then led to an explosion and subsequent water damage. The key is that the insured peril (fire) was a direct and unbroken link in the chain of events leading to the loss. Therefore, the loss caused by water damage, which was a consequence of the fire, is recoverable under the policy that covers fire, even though the initial cause was negligence.

Renewal of an insurance contract is legally considered the creation of a new agreement, rather than a simple continuation of the old one. This means that the terms and conditions of the policy can be re-evaluated and potentially altered by the insurer at the time of renewal, subject to regulatory requirements and the terms of the original contract. Options B, C, and D describe different concepts within insurance: ‘Replacement’ refers to substituting a damaged item, ‘Risk Transfer’ is about shifting the financial burden of a risk, and ‘Salvage’ relates to recovering value from damaged property.