IIQE Paper 1 Principles and Practice of Insurance Examination Quiz 82

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 Insurance Complaints Committee (ICCB) Panel’s powers are guided by its Articles of Association. These stipulate that the Panel must consider the policy terms, general principles of good insurance practice, applicable law, and guidelines from bodies like the Hong Kong Federation of Insurers (HKFI) or the Bureau. Crucially, while policy terms generally prevail, the Panel can override them if they lead to an unfair or unreasonable outcome for the complainant. This means the Panel has discretion to look beyond a literal interpretation of the policy to ensure fairness, particularly in claims handling, referencing standards like the Code of Conduct for Insurers which emphasizes efficient, speedy, and fair claims handling.

The Insurance Authority (IA) mandates that insurance brokers must submit annual audited financial statements to demonstrate their financial health and compliance with regulatory requirements. These statements, along with an auditor’s report confirming adherence to minimum financial standards, must be submitted within six months of the financial year-end. This process ensures the IA can monitor the financial stability of brokers and protect policyholders. While brokers must also disclose their registration number upon request and on business cards, and comply with customer protection declarations for new long-term policies, these are separate obligations from the annual financial reporting.

Renewal of an insurance contract is legally considered the creation of a new agreement, rather than a simple continuation of the existing 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 the recovery of value from damaged property.

The question tests the understanding of the renewal period for an Officer/Technical Representative’s registration. According to the provided syllabus, the registration for an Officer/Technical Representative can be renewed not earlier than three months before its current expiry. This ensures that the registered person has sufficient time to complete any required Continuing Professional Development (CPD) and to meet the ‘fit and proper’ criteria before the current registration lapses, maintaining compliance with regulatory requirements.

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 comprehensive internal controls and safeguards is a fundamental requirement under the AMLO to avoid contraventions and associated penalties.

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 suitability. Focusing solely on favorable aspects of an illustration is also a prohibited practice.

The Insurance Authority (IA) and the Insurance Agents Registration Board (IARB) assess whether an individual is ‘fit and proper’ to be registered as an insurance intermediary. A key aspect of this assessment involves reviewing past conduct. Specifically, the Code of Conduct for Persons Licensed by the IA (the Code) outlines criteria for determining fitness and propriety. Clause 6/31 (viii) explicitly states that a person being considered for registration or continued registration must disclose whether they have ever been found to have not complied with or to be in breach of the Code or the rules of the Hong Kong Federation of Insurers (HKFI). This includes any breaches related to Mandatory Provident Fund (MPF) schemes if the individual is involved in selling or advising on them, as per clauses 6/31 (x) and (xi). Therefore, a history of non-compliance, even if rectified, is a significant factor in the fit and proper assessment.

The Insurance Authority (IA) mandates that insurance brokers must submit annual audited financial statements and an auditor’s report confirming compliance with minimum requirements. This submission is crucial for demonstrating the broker’s financial health and adherence to regulatory standards. The auditor’s report specifically attests to the broker meeting the minimum requirements outlined in the regulations, which are essential for maintaining their license and ensuring client protection. Therefore, the auditor’s report serves as a confirmation of the broker’s compliance with these essential financial and operational standards.

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 a 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 distinct obligations from the annual financial reporting and auditor’s confirmation of compliance with minimum requirements.

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 adequate internal controls and procedures to meet these regulatory requirements and manage associated risks.

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 scenario describes an insurance practitioner moving to a new company and taking copies of their former 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. The Personal Data (Privacy) Ordinance, particularly Data Protection Principle 1, mandates that personal data should only be collected by lawful and fair means and for specified purposes. Using data collected for one purpose (servicing policies at the former employer) for a new purpose (marketing for the new employer) without consent is a breach of this principle. The guidance note specifically advises against copying customer information when changing employment to prevent such misuse.

This question tests the understanding of how subrogation proceeds are shared when the recovery from a negligent third party exceeds the total loss suffered 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 is then shared with the insured. In this scenario, the insured’s loss was $10,000, and the insurer paid $40,000. The recovery from the third party is $45,000. The insurer is entitled to the full $40,000 they paid. The remaining $5,000 ($45,000 recovery – $40,000 insurer payment) is then returned to the insured, as it covers their initial $10,000 loss, with $5,000 of their loss still unreimbursed.

The scenario describes an individual acting as an insurance agent who also sells Mandatory Provident Fund (MPF) schemes. According to the provided text, an insurance agent engaging in both insurance and MPF business must be registered with the Mandatory Provident Fund Schemes Authority (MPFA) as an MPF intermediary. This ensures compliance with regulations governing both insurance and MPF products, safeguarding consumer interests and maintaining market integrity. The other options are incorrect because they either do not address the MPF aspect or suggest registration with bodies not relevant to MPF intermediary status.

The scenario describes an insurance practitioner moving to a new company and taking copies of their former employer’s customer 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 existing policies with the former employer) for a new purpose (marketing for the new employer) without consent is a breach. The guidance note emphasizes that making copies of customer information from a former employer’s records when changing jobs is an example of improper data handling and collection for direct marketing purposes.

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.

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 retains any recovery exceeding the total loss amount, and if the insurer’s payment was less than the full loss, the insured may also be entitled to a share of the subrogation proceeds to cover the unreimbursed portion of their loss. Option A correctly reflects this principle, stating that the insurer can recover up to the amount paid, and any excess belongs to the insured, with the insured potentially sharing in the proceeds if the insurer’s payment was partial.

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 threshold for paid-up share capital and a higher threshold for net assets. Option D is incorrect because it mixes the requirements for unincorporated brokers and includes an irrelevant figure.

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 consequences such as revocation of registration for a specified period, with additional requirements for re-registration. Making a false declaration regarding CPD hours carries a more severe penalty of a 12-month revocation. Therefore, understanding the annual CPD hour obligation is fundamental for compliance.

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 individuals acting solely as Responsible Officers or Technical Representatives, as these roles are defined separately within the context of an Insurance Agency or an Individual Agent. Therefore, a Responsible Officer or a Technical Representative, when acting solely in that capacity, is not considered an ‘Insurance Agent’ under the Code’s primary definition.

The question tests the understanding of the ‘Fitness and Properness’ criteria for registered persons, as outlined in Part E of the Code of Practice for the Administration of Insurance Agents. This section details various requirements and limitations that individuals must meet to be considered suitable for registration. Specifically, it addresses situations where an applicant might have a history of financial misconduct or regulatory breaches, which would directly impact their fitness and properness. Option A correctly identifies that a history of fraudulent activities, such as fraudulent misrepresentation or non-disclosure, would be a significant factor in determining an applicant’s fitness and properness, potentially leading to disqualification or the imposition of strict conditions. Options B, C, and D describe situations that, while potentially relevant to an individual’s professional conduct, are not as directly or severely indicative of a lack of fitness and properness as fraudulent behaviour. For instance, a minor administrative error (B) or a dispute over commission (C) might be addressable through disciplinary action but doesn’t inherently signify a lack of integrity in the same way fraud does. Similarly, while being a director of a company that faced liquidation (D) could raise questions, it’s the nature of the liquidation and the individual’s role that would determine its impact on fitness, whereas fraud is a direct breach of trust and ethical standards.

The scenario describes an insurance agent meeting a client outside the usual office environment. The core principle being tested is the agent’s responsibility to protect the client’s personal data and ensure confidentiality. This aligns with the guidance provided for insurance agents and representatives handling customer data outside the workplace, emphasizing the need to prevent unauthorized access or disclosure of sensitive information. Option (a) directly addresses this responsibility by focusing on safeguarding data during interactions. Option (b) is incorrect because while customer consent is important, it doesn’t negate the primary duty of data protection in public. Option (c) is irrelevant to the immediate concern of data privacy during the meeting. Option (d) is a broader institutional responsibility and not the specific action the agent must take in this situation.

Renewal of an insurance contract is legally considered the creation of a new agreement, rather than a simple continuation of the existing 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. The other options describe different insurance concepts: ‘Replacement’ refers to substituting a damaged item, ‘Risk Transfer’ is about shifting the financial burden of a risk to another party, and ‘Salvage’ relates to the recovery of value from damaged property.

This question tests the understanding of how subrogation proceeds are shared when the recovery from a negligent third party exceeds the total loss suffered 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 goes to the insured until they are made whole for their uninsured portion of the loss. In this scenario, the insured’s loss was $10,000, and the insurer paid $40,000. The total loss is $50,000. The recovery is $45,000. The insurer is entitled to be repaid first from the recovery. Since the insurer paid $40,000, they will receive $40,000 from the $45,000 recovery. The remaining $5,000 from the recovery will then go to the insured to offset their $10,000 uninsured portion of the loss. Therefore, the insured receives $5,000 and the insurer receives $40,000.

The Insurance Complaints Committee (ICCB) Panel’s powers are guided by its Articles of Association. These stipulate that the Panel must consider the policy terms, general principles of good insurance practice, applicable law, and guidelines from bodies like the Hong Kong Federation of Insurers (HKFI) or the Bureau. Crucially, while policy terms generally prevail, the Panel can override them if they lead to an unfair or unreasonable outcome for the complainant. This reflects a broader mandate to ensure fairness beyond strict contractual interpretation, particularly in claims handling, as outlined in codes like the Code of Conduct for Insurers which emphasizes efficient, speedy, and fair claims handling. Therefore, the Panel’s authority extends to looking beyond the literal wording of a policy if it results in an inequitable situation for the policyholder.

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 clients, and failure to do so, resulting in financial loss for the client, can constitute professional negligence. This negligence can lead to legal liability, making professional indemnity insurance a crucial requirement for brokers to cover potential claims arising from such errors or omissions. An insurance agent, on the other hand, typically acts as a representative of the insurer and, unless they profess specialized skills, generally has a lower duty of care to the policyholder, and is not statutorily required to hold professional indemnity insurance.

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 these notification requirements under the PDPO for direct marketing purposes.

Subrogation is a legal principle that 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. The insurer can only recover the amount it paid out in indemnity, not more. This principle is crucial for preventing unjust enrichment and ensuring that the party at fault bears the ultimate financial responsibility. The question tests the understanding of the insurer’s rights and limitations under subrogation, specifically that the recovery is capped at the indemnity amount paid.

This question tests the understanding of subrogation, specifically how it operates when an insurer has only partially indemnified a loss due to policy limitations. Subrogation allows an insurer to step into the shoes of the insured to recover from a third party responsible for the loss. However, the insurer’s recovery is generally limited to the amount they have paid. If the insurer paid less than the full loss due to a policy deductible or a specific limit, and the insured also suffered an unreimbursed portion of the loss, the insured may have a right to a portion of any recovery obtained through subrogation. This is to ensure the insured is made whole for their unreimbursed loss before the insurer profits from the subrogation recovery beyond their payout. Option B is incorrect because the insurer’s right to subrogation is generally limited to the amount paid, not the total loss. Option C is incorrect as the insured’s right to sue the third party is typically transferred to the insurer upon payment, not retained by the insured if the insurer has fully indemnified the loss. Option D is incorrect because while the insurer can pursue the third party, the distribution of recovered funds is subject to the principle of indemnity and any applicable policy limitations.