IIQE Paper 1 Principles and Practice of Insurance Examination Quiz 09 Advanced

The Insurance Authority (IA) assesses the ‘fit and proper’ status of controllers, directors, key persons in control functions, and appointed actuaries of authorized insurers. This assessment is crucial for maintaining the integrity and stability of the insurance market in Hong Kong. Several factors are considered by the IA during this assessment, including the person’s education, qualifications, and experience, which are essential indicators of their competence to fulfill their responsibilities. The IA also evaluates the person’s ability to act competently, honestly, and fairly, ensuring they will conduct business ethically and in the best interests of policyholders. A person’s reputation, character, reliability, and integrity are also carefully scrutinized, as these qualities are vital for maintaining trust and confidence in the insurance industry. The financial status or solvency of the individual is considered to ensure they are not susceptible to undue influence or financial pressures that could compromise their judgment. Any disciplinary action taken by other authorities or regulatory organizations is reviewed to identify any past misconduct or regulatory breaches. If the person is part of a group of companies, the IA may consider information about other companies within the group, as well as the controllers or directors of those companies, to assess potential risks or conflicts of interest. Finally, the IA considers the state of affairs of any other business the person carries on or proposes to carry on, to ensure there are no conflicts of interest or potential risks to the insurer. Therefore, all the listed factors are relevant considerations for the IA when determining whether a person meets the ‘fit and proper’ requirements. The correct answer includes all the options.

The Insurance Ordinance outlines specific requirements for insurers to maintain adequate reinsurance arrangements. This is crucial for protecting policyholders and ensuring the financial stability of the insurer. The level of reinsurance must be sufficient to cover potential liabilities. It is not simply about meeting the solvency margin or placing all reinsurance within Hong Kong. The focus is on the adequacy of the reinsurance to safeguard against potential losses and maintain financial health.

Therefore, the correct answer emphasizes the need for reinsurance to be adequate.

The Insurance Authority (IA) possesses the authority to take disciplinary actions against regulated persons, including licensed insurance intermediaries and responsible officers, under specific circumstances outlined in the Insurance Ordinance. These circumstances include acts or omissions prejudicial to policyholders or the public interest, misconduct by the intermediary due to the consent or neglect of a responsible officer, and instances where the regulated person is deemed unfit based on their conduct.

Specifically, if a licensed insurance intermediary (individual or partnership) enters into a voluntary arrangement with creditors, faces a bankruptcy order, or is convicted of an offense that, in the IA’s opinion, affects their fitness and properness, the IA may take action. Similarly, if a licensed insurance intermediary (company) has a receiver or manager appointed, enters into a scheme of arrangement with creditors, or goes into liquidation, the IA can intervene. Convictions of offenses by directors or controllers of a licensed insurance intermediary that impugn their fitness also trigger potential IA action.

The IA’s powers under section 81 of the Insurance Ordinance include revoking or suspending an insurance intermediary’s license, revoking or suspending a responsible officer’s approval, prohibiting a person from applying for a license or being appointed as a responsible officer, issuing reprimands (public or private), and imposing pecuniary penalties up to HK$10,000,000 or three times the profit gained or loss avoided as a result of the misconduct.

Statement I is correct. The Insurance Authority (IA) assesses a person’s education, qualifications, and experience to determine if they are fit and proper for a controller, director, or key person role.

Statement II is correct. The IA considers a person’s ability to act competently, honestly, and fairly as part of the ‘fit and proper’ assessment.

Statement III is incorrect. While the IA considers the financial status or solvency of the person, it also considers the state of affairs of *any* other business which the person carries on or proposes to carry on, not just insurance-related businesses.

Statement IV is incorrect. The IA considers disciplinary actions taken by *any* authority or regulatory organization, not just those within the insurance industry.

Therefore, statements I and II are correct.

I: Correct. According to the Insurance Authority (IA), a proposed responsible officer of a licensed insurance agency is exempt from specified education or professional qualifications if they were a Responsible Officer registered with the IARB at any time before 23 September 2019.
II: Correct. The IA stipulates that a proposed responsible officer of a licensed insurance broker company is exempt from certain qualifications if they were a Chief Executive registered with the CIB or PIBA at any time before 23 September 2019.
III: Incorrect. While relevant experience is expected, the IA generally expects a minimum of 5 years’ experience in the insurance industry, including at least 2 years of management experience, not 3 years.
IV: Incorrect. The IA assesses an individual’s competence, considering whether they have been dismissed or requested to resign for reasons such as misconduct, incompetence, negligence, or mismanagement. Mental health status is also considered, but the statement is not fully accurate as it is written.

Statements I and II are correct.

I: Correct. Licensed insurance broker companies are required to maintain records in either Chinese or English, or in a manner that allows for easy conversion into either language. This ensures accessibility and compliance with regulatory requirements.
II: Correct. As per the Insurance Ordinance (IO) and related rules, licensed insurance broker companies must retain required records for a minimum of 7 years. This retention period is crucial for regulatory oversight and potential audits.
III: Incorrect. While financial statements must include insurance brokerage income, aggregate balances of client accounts, and insurance premiums payable, this requirement does not apply to the audited financial statements of a specified insurance broker company for a financial year beginning before 1 January 2021.
IV: Correct. Documents provided under section 73(1) of the IO (excluding the auditor’s report) must be approved by the directors and signed by two directors, or by the sole director if the company has only one. This ensures accountability and proper authorization.

Therefore, statements I, II, and IV are correct.

Statement I is correct. The training and development department plays a crucial role in enhancing the company’s performance by equipping staff and agents with the necessary skills and knowledge.

Statement II is correct. Training should be aligned with the company’s objectives and contribute to its overall success, rather than being a detached activity.

Statement III is incorrect. While education and professional qualifications are important, preparations for these are typically encouraged rather than directly provided by the company, especially for external professional qualifications.

Statement IV is correct. Maintaining adequate resources, such as libraries and training aids, along with up-to-date records of individual training progress, is essential for the efficient operation of the training and development section.

Therefore, statements I, II, and IV are correct.

Statement I is correct. According to Part 6A of the Personal Data (Privacy) Ordinance, direct marketing includes offering or advertising goods, facilities, or services through direct marketing means.

Statement II is incorrect. While a data user must inform the data subject of certain prescribed information, providing the data subject with a response channel is to allow the data subject to indicate whether they object to the intended use or provision, not necessarily to provide consent.

Statement III is correct. The ‘grandfathering arrangement’ allows data users to continue using personal data for direct marketing if they were already doing so in compliance with the pre-existing requirements of the Ordinance before the new provisions came into force, specifically for the same class of marketing subjects.

Statement IV is incorrect. A data user must notify a data subject of their opt-out right when using personal data in direct marketing for the first time. The maximum penalty for contravention is indeed a fine of HK$500,000 and imprisonment for 3 years.

Therefore, statements I and III are correct.

The Insurance Ordinance (IO) outlines specific exemptions from licensing requirements for individuals involved in regulated activities related to insurance. It’s crucial to understand who qualifies for these exemptions and under what circumstances.

Counsel, solicitors, certified public accountants, trust companies, and actuaries are generally exempt from licensing requirements when giving regulated advice.

Newspapers, television or radio broadcasts, and electronic communications to the public are also exempt.

Those engaged in loss assessment or settling claims on behalf of an authorized insurer are exempt.

A company giving regulated advice to a specified company (wholly owned subsidiary, sole shareholding company, or a wholly owned subsidiary of that sole shareholding company) is exempt.

Individuals performing only clerical or administrative duties for an authorized insurer or a licensed insurance intermediary are exempt.

Employees of authorized insurers carrying on reinsurance business only or captive insurers are exempt.

Employees of authorized insurers involved solely in risk assessment, determining insurance contract terms, or processing claims are exempt.

Therefore, an individual actively marketing insurance services to the public from outside Hong Kong is not exempt and requires a license.

The Insurance Authority (IA) assesses the fitness and properness of insurance intermediaries based on several criteria, including reputation, character, financial status, and solvency. When evaluating a business entity, the IA considers various factors that could indicate potential risks.

Receivership, administration, or liquidation proceedings against a business entity raise concerns about its financial stability and ability to meet its obligations. Similarly, entering into a scheme of arrangement with creditors or failing to satisfy a judgment debt suggests financial distress. The IA also assesses whether the business entity maintains sufficient resources to comply with applicable financial requirements, such as capital, assets, and liquidity.

For sole proprietorships or partnerships, the IA assesses the reputation, character, and financial status of the sole proprietor or each partner, as applicable. The IA also considers whether a controller, director, or partner of the business entity has been subject to investigation or disciplinary action by a professional body, or has been involved with another business entity that experienced financial difficulties or compliance issues.

Furthermore, the IA requires licensed insurance broker companies to comply with specific requirements related to capital, net assets, professional indemnity insurance, and the handling of client accounts. The IA also has the power to make rules and issue codes or guidelines to regulate the conduct of licensed insurance intermediaries.

I. Correct. According to the Insurance Authority (IA), a proposed responsible officer of a licensed insurance agency is exempt from specified education or professional qualifications if they were a Responsible Officer registered with the IARB at any time before 23 September 2019.
II. Correct. The IA also exempts a proposed responsible officer of a licensed insurance agency if they were an Individual Agent or Technical Representative registered with the IARB at any time before 23 September 2019 and already possessed a minimum of 15 years’ experience in insurance-related work in the insurance industry in Hong Kong on 23 September 2019.
III. Incorrect. While experience is important, the IA generally expects a responsible officer to possess a minimum of 5 years’ experience in the insurance industry, including at least 2 years of management experience. The statement is incorrect because it states 3 years of management experience.
IV. Correct. The IA assesses the competence of an applicant, including whether the individual has been dismissed or requested to resign from any position or office for misconduct, incompetence, negligence, or mismanagement.

Therefore, statements I, II, and IV are correct.

I. Correct. A contract is considered voidable if one party has the option to rescind it due to factors like misrepresentation or duress. This aligns with the definition of defective contracts under IIQE Paper 1.
II. Incorrect. An unenforceable contract is valid in its formation but cannot be enforced in court due to legal impediments, such as the lack of written evidence where required by the Statute of Frauds. While it is a type of defective contract, it’s not void from the beginning.
III. Correct. A contract is void if it lacks an essential element from its inception, such as legality of object, making it invalid from the start. This is a key aspect of defective contracts.
IV. Incorrect. A valid contract is legally binding and enforceable, possessing all the necessary elements. It is not considered a defective contract.
Conclusion: Statements I and III are correct.

The Insurance Ordinance sets restrictions to prevent conflicts of interest and ensure proper oversight within the insurance industry. Let’s analyze each statement:

Statement I: This statement is correct. A director of a licensed insurance broker company who manages regulated activities cannot also be a proprietor of a licensed insurance agency. This prevents a single individual from simultaneously controlling entities that could have conflicting interests.

Statement II: This statement is incorrect. A licensed technical representative (agent) is permitted to be associated with only one licensed insurance agency. They cannot be a licensed technical representative (agent) of another agency to avoid potential conflicts of interest and ensure focused representation.

Statement III: This statement is correct. A licensed technical representative (broker) is restricted from operating beyond the scope of the licensed insurance broker company they represent. This ensures they act within the bounds of their company’s licensed business and expertise.

Therefore, statements I and III are correct.

Statement I is correct. An automatic reinstatement clause does indeed allow the policy’s aggregate limit to be restored after a claim is paid, either through mutual agreement (endorsement) or a pre-agreed condition within the policy. This ensures continued coverage up to the original aggregate limit, subject to the terms of the reinstatement.

Statement II is also correct. In the context of non-marine insurance, ‘average’ refers to a provision that penalizes under-insurance. If a property is insured for less than its full value, the insured may only receive a proportion of any partial loss.

Statement III is correct. A bailee is accurately defined as someone who takes possession of goods with the owner’s consent, without any intention of transferring ownership. This arrangement creates a responsibility for the bailee to safeguard the goods.

Therefore, statements I, II, and III are correct.

I. Correct. Insurable interest in life insurance is indeed required at the policy’s inception. This is a fundamental principle to ensure the policy’s validity under the Insurance Ordinance.
II. Correct. As per the Insurance Ordinance, a person has an insurable interest in their own life and the life of their spouse. This is a legally recognized relationship.
III. Incorrect. While a financial relationship can contribute to insurable interest, it is not sufficient on its own. There must be a legally recognized relationship, as stated in the IIQE Paper 1 syllabus.
IV. Correct. According to the syllabus, a person can insure the life of their child or ward (under guardianship) who is under 18 years of age, and the policy remains valid even after the insured turns 18.
Conclusion: Statements I, II, and IV are correct.

A licensed technical representative (broker) has specific responsibilities regarding record-keeping, cooling-off periods, claims assistance, competence, and information disclosure, as outlined in the Insurance Ordinance and related regulations.

Statement I: According to regulatory requirements, a licensed technical representative must adhere to the record-keeping policies established by their broker company to comply with regulatory standards. This ensures proper documentation and accountability.

Statement II: Before a client finalizes an insurance policy application, the broker is obligated to inform the client about their right to cancel the policy during the cooling-off period. The broker must also advise the client to notify the insurer directly if they wish to exercise this right. This ensures the client is fully aware of their cancellation rights.

Statement III: Unless otherwise specified in the client agreement, a licensed insurance broker should offer reasonable assistance to the client in submitting insurance claims for policies arranged by the broker. The broker should also promptly relay any relevant claim information received from the client to the insurer. This ensures the client receives support during the claims process.

All three statements accurately reflect the duties and responsibilities of a licensed technical representative (broker) under the Insurance Ordinance and related guidelines.

Therefore, statements I, II, and III are correct.

Statement I is correct. Reinsurance is indeed a mechanism by which an insurer transfers a portion of its risk to another insurer, known as a reinsurer. This helps the original insurer manage its exposure.

Statement II is correct. A primary reason insurers purchase reinsurance is to enhance their financial security. Reinsurance can provide immediate claim payments to the reinsured in the event of a valid direct claim exceeding a pre-determined figure, even before the reinsured has actually paid the direct claim.

Statement III is incorrect. The policyholder typically has no direct involvement or right to information regarding the reinsurance arrangements of their insurer. The reinsurance agreement is solely between the insurer and the reinsurer.

Statement IV is correct. Reinsurance indirectly benefits policyholders by providing an added layer of security, ensuring that the insurer is more likely to be able to meet its obligations under the insurance contract, regardless of its reinsurers’ financial condition.

Therefore, statements I, II, and IV are correct.

Abandonment, primarily used in marine insurance, involves the insured relinquishing all rights to the insured property to the insurer in exchange for a total loss settlement. This practice is detailed in section 3.4.6 of the IIQE Paper 1 syllabus. Academic classification categorizes insurance for educational purposes, as outlined in section 5.1.3, including insurance of the person, property, pecuniary interest, and liability. Acceptance, a key element of contract law (section 2.1.3(b)), signifies agreement to an offer, forming a binding contract. Understanding these definitions is crucial for the IIQE Paper 1 exam.

In insurance, ‘assignment’ refers to the transfer of rights. There are two main types: assignment of the insurance contract and assignment of the right to insurance monies. When an insurance contract is assigned, the original policyholder’s interest passes to the new policyholder, meaning any subsequent losses are paid to the assignee, not the assignor. However, in life insurance, the life insured cannot be changed through assignment. If only the right to insurance monies is assigned, the policy still covers losses suffered by the assignor, but the assignee has the right to claim from the insurer. For an assignment of the insurance contract to be valid, both parties must have insurable interest at the time of assignment. However, for assignment of the right to insurance monies, the assignee doesn’t need insurable interest. Insurer consent is generally not required for assignment of insurance monies, but it may be needed for assignment of the insurance contract, depending on the type of policy. Finally, assignment only transfers rights, not obligations, unless the insurer consents to the transfer of obligations. The Law Amendment and Reform (Consolidation) Ordinance section 9 applies to statutory assignments.

Statement I is correct. According to the Insurance Ordinance, a licensed insurance intermediary must consider the policyholder’s circumstances to ensure the regulated activity is appropriate for them. Statement II is correct. Intermediaries are required to disclose necessary information to policyholders, enabling them to make informed decisions. Statement III is incorrect. While intermediaries must avoid conflicts of interest and disclose them, they are only required to use their best endeavors to avoid such conflicts, not absolutely avoid them. Statement IV is correct. Licensed insurance intermediaries must comply with the rules prescribed by the Insurance Authority (IA) under specified sections of the Insurance Ordinance. Therefore, statements I, II, and IV are correct.

A contract is fundamentally a legally enforceable agreement, forming the bedrock of commercial and personal interactions. Simple contracts, prevalent in insurance, can be formed verbally, in writing, or even through conduct, without needing special formalities like a seal. Contracts by deed, on the other hand, require specific formalities such as signing, sealing, and delivery (now interpreted as an intention to be bound), and are used for transactions like land transfers and suretyship. The absence of essential elements can render a contract void (non-existent in law) or voidable (valid until challenged by an aggrieved party).

Statement I is correct. According to IIQE Paper 1 guidelines, when a client is referred by another person, the agent should inform the client that they are responsible for arranging the insurance policy and the client should deal directly with them.

Statement II is correct. The agent must inform the client that the referrer does not represent the agent and should not be involved in arranging the insurance.

Statement III is correct. The agent should disclaim all liability for any advice given by the referrer regarding the insurance policy.

Statement IV is correct. The agent must inform the client that premium payments should be made directly to the insurer or, if permitted, to the agent, but not to the referrer.

Therefore, all statements are correct.

According to Guidance Note 24 (GL24) issued by the Insurance Authority (IA), a ‘principal’ has specific meanings depending on the type of licensed individual. For a licensed individual insurance agent, the principal is the authorized insurer that appoints them. For a licensed technical representative (agent), the principal is the licensed insurance agency that makes the appointment. Lastly, for a licensed technical representative (broker), the principal is the licensed insurance broker company responsible for the appointment. Understanding these definitions is crucial for determining the responsibilities and relationships within the insurance industry as regulated by the IA.

I. Correct. As per IIQE Paper 1 syllabus, a principal is obligated to remunerate the agent as agreed upon, including commissions or bonuses, within a reasonable or specified timeframe.
II. Correct. The principal is generally required to reimburse the agent for reasonable expenses incurred while acting on the principal’s behalf, unless otherwise specified in the agency agreement.
III. Incorrect. While an agent can take action against a principal for breach of obligations, the death of the principal automatically terminates the agency agreement due to its personal nature. The agent’s action for breach would likely need to occur before the principal’s death.
IV. Incorrect. If the agency agreement is for a determined period, it will terminate at the end of such period. This is a standard way an agency agreement can be brought to an end, and it does not require a breach of duty by the principal.

Therefore, statements I and II are correct.

To be eligible for an individual insurance agent license, a technical representative (agent) license, or a technical representative (broker) license, individuals must meet specific academic or professional qualifications as outlined by the Insurance Authority (IA). These qualifications include achieving a certain level in the Hong Kong Diploma of Secondary Education Examination (HKDSE) or the Hong Kong Certificate of Education Examination (HKCEE), holding a Diploma Yi Jin, possessing an International Baccalaureate Diploma, or obtaining a diploma from a recognized higher education institution. The IA also recognizes specific insurance qualifications and other qualifications deemed equivalent or higher.

Exemptions from these qualifications are granted to individuals who were ‘specified persons’ before September 23, 2019, and have remained continuously engaged in insurance-related work in Hong Kong. ‘Specified persons’ include individuals registered with the IARB, CIB, or PIBA in various roles. Furthermore, exemptions from certain IIQE papers are provided based on specific insurance, actuarial, and professional qualifications, or for those with substantial experience in the insurance business before January 1, 2000. However, IIQE results may lapse if an individual ceases insurance practice for two or more consecutive years, unless they hold a specified insurance, actuarial, or professional qualification.

Proposed responsible officers must possess a bachelor’s degree from a recognized university, an insurance qualification specified by the IA, or any other qualification considered equivalent or higher by the IA.

Statement I is correct. According to IIQE Paper 1 guidelines, a licensed technical representative (broker) must adhere to the record-keeping policies and procedures established by the licensed insurance broker company they represent to ensure compliance with regulatory requirements.

Statement II is incorrect. While brokers should assist clients with claims, this assistance is generally provided when requested by the client, unless otherwise stated in the client agreement. It is not an absolute requirement to provide assistance regardless of the client’s wishes.

Statement III is correct. A licensed insurance broker should possess the necessary professional knowledge and experience to conduct regulated activities competently. This aligns with General Principle 4 of the IIQE Paper 1 syllabus.

Statement IV is incorrect. While disclosing information is important, the specific items listed (name and license number) are only part of the required disclosures. The statement is incomplete as it doesn’t mention other crucial information that must be disclosed, such as capacity.

Therefore, statements I and III are correct.

Individual licensees are obligated to report their Qualified CPD Activities to the Insurance Authority (IA) using a CPD Declaration Form within two months after the assessment period concludes, specifically by September 30th. Any excess CPD hours cannot be transferred to future assessment periods. Licensees must also inform their principals about the reported CPD activities by the same deadline. Licensees must retain documentary evidence of their CPD activities for at least three years after the assessment period and provide it to the IA upon request for compliance checks. Principals are responsible for ensuring their appointed licensees comply with CPD requirements and should verify the information submitted on the CPD Declaration Forms.

Statement I is correct because individual licensees must indeed report their CPD activities to the IA using a specific form and within a defined timeframe.

Statement II is incorrect because CPD hours exceeding the minimum requirement cannot be carried forward to subsequent assessment periods.

Statement III is correct because principals have a responsibility to ensure that their individual licensees comply with the CPD requirements, including verifying the submitted CPD Declaration Forms.

Therefore, statements I and III are correct.

I. Incorrect. Fire insurance primarily covers property damage or loss due to fire, not typically associated with money laundering.
II. Correct. Purchased annuities, especially single premium annuities, can be used to launder money by converting illicit funds into legitimate-looking income streams.
III. Incorrect. Motor insurance is generally not a common tool for money laundering due to the relatively low value and high traceability of transactions.
IV. Correct. Unit-linked single premium contracts are often used in money laundering schemes because they allow large sums of money to be invested and then withdrawn, obscuring the original source of the funds. Therefore, statements II and IV are correct.

The Insurance Ordinance (IO) outlines exemptions from licensing requirements for certain individuals and circumstances. Specifically, employees of authorized insurers who solely conduct risk assessments, determine insurance contract terms, or process claims are exempt. Similarly, individuals performing only clerical or administrative duties for an authorized insurer or licensed insurance intermediary do not require a license. However, this exemption does not extend to direct sales staff who provide advice on insurance coverage to policyholders on behalf of the insurer; they need an individual insurance agent license. Counsel, solicitors, certified public accountants, trust companies, and actuaries are also exempt under specific conditions. The statutory exemption does not extend to the insurer’s agents.

The Insurance Ordinance (IO) mandates that any entity intending to conduct insurance business in or from Hong Kong must secure authorization from the Insurance Authority (IA). This authorization process includes meeting specific minimum requirements related to paid-up capital, solvency margin, the suitability of directors and controllers, and the adequacy of reinsurance arrangements. The IA also provides guidelines to ensure the ongoing financial soundness and suitability of insurers. The minimum paid-up capital requirements vary based on the type of insurance business conducted. For general or long-term business (excluding statutory insurance), the minimum is HK$10 million. If statutory insurance is involved, or if both general and long-term business are conducted, the minimum is HK$20 million. Captive insurers have a lower minimum requirement of HK$2 million. Solvency margin refers to the extent to which an insurer’s assets exceed its liabilities, acting as a buffer against potential inability to meet obligations. The required solvency margin is determined differently for general and long-term business. For general business, it’s calculated based on premium income and outstanding claims, with the higher figure used, subject to a minimum of HK$10 million (or HK$20 million for statutory insurance). For long-term business, the calculation follows the Insurance Companies (Margin of Solvency) Regulation, with a minimum of HK$2 million. Composite businesses follow the respective rules for long-term and general business. Captive insurers’ solvency margin is based on either premium income or outstanding claims, whichever is higher, with a minimum of HK$2 million.