IIQE Paper 1 Principles and Practice of Insurance Examination Quiz 83

The question tests the understanding of how salvage value affects the indemnity provided by an insurance policy. When damaged property has a 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. In this scenario, the damaged vehicle has a salvage value of $5,000. The total repair cost is $12,000. If the insurer pays the full repair cost and takes the salvage, they can recover $5,000, making their net payout $7,000. Alternatively, if they deduct the salvage value from the payout, the insured receives $7,000 ($12,000 – $5,000) and keeps the damaged vehicle. Both methods result in the insurer effectively paying $7,000 for the loss, which is the indemnity after accounting for the salvage.

This question tests the understanding of an insurer’s obligations regarding the financial health and compliance of its members, as stipulated by relevant regulations. Specifically, it focuses on the requirement for an insurer to verify that its members have submitted their financial statements and auditor’s reports as per the membership rules. The correct answer highlights the insurer’s duty to ensure these submissions are received and that the auditor’s reports contain no adverse statements or qualifications beyond those already noted by the insurer itself. This demonstrates a proactive approach to risk management and regulatory compliance, ensuring the overall financial stability and integrity of the group.

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, enforcing indemnity rather than exceeding it.

The scenario describes an insurance practitioner moving to a new company and taking copies of previous customers’ policy information. This action directly violates the principle of lawful and fair means of data collection and the prohibition against changing the purpose of data use. Specifically, using data collected for one purpose (servicing policies with the former employer) for a new purpose (marketing for the new employer) without consent is a breach. The Personal Data (Privacy) Ordinance (PDPO) and its associated codes of practice emphasize that personal data should only be used for the purpose for which it was collected, or for a directly related purpose, unless consent is obtained for other uses. Taking copies of customer information for personal gain and to solicit business for a new employer constitutes a misuse of data and a breach of trust and privacy principles.

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 reports, paying close attention to any adverse statements or qualifications from auditors regarding financial statements and minimum requirements. The correct answer reflects the comprehensive nature of this oversight, encompassing both the receipt of documents and the critical analysis of auditor findings.

The Code of Practice for the Administration of Insurance Agents defines an ‘Insurance Agent’ broadly to encompass individuals and agencies acting as intermediaries for insurers. Crucially, it explicitly excludes Responsible Officers and Technical Representatives from this definition, as they hold distinct roles within the agency structure. Therefore, a person acting as a Technical Representative for an insurance agency, even if they advise on or arrange insurance contracts, is not classified as an ‘Insurance Agent’ under the Code’s specific definition.

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.

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 thoroughly understanding the client’s situation and recommending a product that genuinely fits, rather than pushing a sale. Misrepresenting policy features or benefits, especially to encourage the replacement of existing policies to the client’s detriment, is a serious breach of conduct. Offering unauthorized rebates or incentives is also prohibited, as it can distort the client’s decision-making process and undermine fair market practices. Therefore, the scenario described, where a registered person prioritizes understanding the client’s financial situation and needs before recommending a policy, directly reflects the ethical and regulatory obligations for long-term business representatives.

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, operating an insurance business without this prior authorization from the IA is a violation of the regulatory framework.

The Insurance Claims Complaints Bureau (ICCB) is a self-regulatory body established by the insurance industry in Hong Kong. Its primary function is to handle complaints from individual policyholders concerning claims arising from personal insurance contracts with its member insurers. The ICCB’s Insurance Claims Complaints Panel, which handles these complaints, has the authority to make awards against insurers. The maximum award amount the Panel can make is HK$800,000. 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.

The core principle here is that financial institutions (FIs) must establish robust internal controls to prevent their employees, including appointed insurance agents, from inadvertently or intentionally revealing information that could tip off customers or others about suspicious activity investigations. This involves training staff to recognize unusual patterns, understand their reporting obligations, and conduct customer due diligence (CDD) in a manner that avoids disclosure. The guideline emphasizes that even when agents provide records to insurers, the agents remain responsible for ensuring the insurer’s systems comply with record-keeping requirements and that these records are readily accessible to regulatory authorities. Therefore, an agent’s responsibility extends to verifying the insurer’s compliance framework regarding AML/CFT record-keeping.

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 and receive reports. Furthermore, the IARB can direct principals or registered persons to take disciplinary action and has the power to register or revoke the registration of insurance agents, responsible officers, and technical representatives. Finally, it is mandated to report breaches of the Insurance Ordinance or the Code to the Insurance Authority (IA) if a registered person is found to be unfit or has contravened regulations. Therefore, all these functions fall within the purview of the IARB’s responsibilities.

Participating policies, also known as with-profit policies, offer policyholders a share in the insurer’s profits. These profits are typically distributed in the form of bonuses, which can be reversionary (added to the sum assured and payable on death or maturity) or cash bonuses (paid directly to the policyholder). The consideration for these bonuses is the additional premium paid by the policyholder for the profit-sharing element. Non-participating policies do not share in profits and are generally cheaper as they offer a fixed benefit. Therefore, the primary consideration for a policyholder choosing a participating policy over a non-participating one is the potential to receive bonuses derived from the insurer’s profits.

The question tests the understanding of the role of an accountant within an insurance company, specifically focusing on the importance of managing company assets. While record-keeping, collections, and payments are all crucial accounting functions, the prompt highlights the accountant’s responsibility for the care and placement of company assets, especially if there isn’t a dedicated investment department. This responsibility is paramount for ensuring security, achieving a reasonable return on investment, and maintaining sufficient liquidity to meet financial obligations. Therefore, the most critical aspect of the accountant’s role in this context, as emphasized in the provided text, is the management of investments.

The question tests the understanding of the minimum paid-up capital requirements for authorized insurers in Hong Kong, as stipulated by the Insurance Companies Ordinance. Specifically, it focuses on the scenario where an insurer carries on both General and Long Term business. According to the provided text, the minimum paid-up capital requirement for an insurer carrying on both General and Long Term business is HK$20 million. The other options represent different capital requirements for different types of insurers or business lines: HK$10 million is the minimum for General Business if not carrying on statutory insurance business, HK$2 million is the minimum for Long Term Business or Captive Insurers, and HK$5 million is not a specified minimum capital requirement in the provided context.

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. In the context of life insurance, the requirement is generally at the inception of the policy. A person has an insurable interest in their own life, spouse’s life, and in the life of a child or ward under 18. While a parent might have an insurable interest in their adult child’s life due to potential financial dependency or emotional loss, this is not automatically presumed in the same way as for a spouse or minor child. The scenario describes a situation where a parent is insuring the life of their adult child. For this to be valid, the parent must demonstrate a financial dependency or a significant financial loss that would be incurred upon the child’s death, beyond mere emotional distress. Without this demonstrable financial stake, the insurable interest is lacking.

This question tests the understanding of an insurer’s obligations regarding its members’ financial statements and auditor reports, as stipulated by relevant regulations. Specifically, it focuses on the requirement for the insurer to have received these documents from each member and to have reviewed them for any adverse statements or qualifications. The correct answer highlights the insurer’s responsibility to ensure compliance with membership rules and to scrutinize auditor reports for any issues that might indicate financial instability or non-compliance among its members. The other options are distractors that do not fully encompass the insurer’s duties in this regard.

This question tests the understanding of apparent authority in agency law, a key concept within the IIQE syllabus. Apparent authority arises when a principal’s actions lead a third party to reasonably believe that an agent has the authority to act on the principal’s behalf, even if the agent lacks actual authority. In the scenario, the insurer’s consistent issuance of policies for cargo risks to West Africa, despite the agent being expressly forbidden, creates a situation where a reasonable third party would infer that the agent possesses the authority to bind the insurer for such risks. This is the essence of apparent authority, which binds the principal to the contract with the third party, even though the agent acted against the principal’s express instructions. Option B is incorrect because actual authority refers to the authority expressly or impliedly granted by the principal to the agent. Option C is incorrect as ratification occurs when a principal retrospectively approves an unauthorized act, which is not the primary mechanism at play here; the ongoing conduct is creating the appearance of authority. Option D is incorrect because ostensible authority is synonymous with apparent authority, but the explanation focuses on the specific mechanism of apparent authority arising from the principal’s conduct.

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 when providing advice or services. Failure to do so, resulting in financial loss for the client, can constitute professional negligence. Unlike insurance agents, who primarily represent the insurer and may not profess the same level of specialized expertise to clients, brokers are expected to prioritize the policyholder’s interests and provide impartial advice. Consequently, brokers are typically required to maintain Professional Indemnity insurance to cover potential claims arising from such negligence, whereas this is not a statutory requirement for insurance agents.

This question tests the understanding of the fundamental definition of a contract within the context of insurance. A contract is defined as a legally enforceable agreement. While an insurance policy serves as evidence of a contract, it is not the contract itself. The core of a contract lies in the mutual promises and undertakings that are legally binding. Therefore, the most accurate and encompassing definition of a contract, as it relates to insurance and general legal principles, is a legally enforceable agreement.

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 portion 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 entire sum insured for all contents, which is a significant risk for the insurer, particularly concerning theft. The other options describe different insurance concepts: ‘section limit’ applies to distinct sections within a policy (like 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, often for items where depreciation is minimal or valuation is 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, 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 audit the broker’s financial activities and overall business health.

The Insurance Ordinance in Hong Kong categorizes insurance business into Long Term Business and General Business. Long Term Business is further subdivided into nine 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 seventeen classes, such as Accident, Sickness, Land Vehicles, Railway Rolling Stock, Aircraft, Ships, and Goods in Transit. The question tests the understanding of how the Ordinance classifies insurance, specifically focusing on the distinction between Long Term and General Business and the types of policies that fall under each. Class F, Capital Redemption, is correctly identified as a Long Term Business category, distinct from General Business classes like Goods in Transit (Class 7).

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 a proposer must disclose facts that increase risk or affect premium calculation, they are not obligated to disclose facts that diminish the risk, as this information would not negatively impact the insurer’s decision-making process. Therefore, failing to mention the presence of an automatic sprinkler system, which reduces fire risk and would likely lead to a lower premium, does not constitute a breach of utmost good faith.

This question tests the understanding of an insurance intermediary’s role in preventing and reporting potential insurance fraud, specifically concerning fraudulent claims. While an intermediary is not a law enforcement officer, they have a duty not to assist in fraud and to report suspicions. Option (a) correctly identifies this duty to report suspicious circumstances or evidence. Option (b) is incorrect because while an intermediary should be diligent, their primary responsibility is not to conduct a full investigation like a detective; that is the insurer’s role. Option (c) is incorrect as the intermediary’s duty is to report suspicions to the insurer, not to directly confront the claimant or attempt to resolve the issue independently. Option (d) is incorrect because while maintaining integrity is crucial, it doesn’t specifically address the action required when a fraudulent claim is suspected.

This question tests the understanding of the fundamental principles of risk management and insurance, specifically the distinction between different types of risks. A pure risk is one where there is only the possibility of loss or no loss, with no chance of gain. Speculative risk involves the possibility of both gain and loss. Fundamental risk affects a large segment of the population or economy, while particular risk affects only individuals or specific groups. The scenario describes a situation where a business faces the potential for financial loss due to a natural disaster, but there is no possibility of financial gain from the event itself. Therefore, it exemplifies a pure risk.

The scenario describes a Registered Person (RP) who has failed to provide requested documentation to the Insurance Authority (IA) regarding their Continuing Professional Development (CPD) compliance. According to the provided text, if an RP fails to respond to a request from the IA to produce proof of compliance with CPD requirements, their registration should be revoked for a period determined by the IA. Furthermore, their future registration applications will not be processed until proof of compliance is provided. This directly aligns with the consequence of non-compliance when an RP does not respond to the IA’s request for proof of CPD.

The scenario describes a Registered Person (RP) who has failed to provide requested documentation regarding their Continuing Professional Development (CPD) hours to the Insurance Authority (IA) when asked. According to the provided information, failure to respond to such a request leads to the IA’s discretion in revoking the RP’s registration for a specified period. Furthermore, any future application for registration will only be processed upon submission of proof of compliance. Therefore, the most appropriate consequence is the revocation of registration for a period determined by the IA, coupled with the requirement to provide proof of compliance for future applications.

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 up to the greater of $10 million or three times the profit gained or costs avoided due to the contravention. Therefore, establishing and maintaining proper safeguards is a fundamental requirement under the AMLO to avoid both criminal liability and regulatory sanctions.

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 their CPD obligations would be in breach of the IA’s regulations.