IIQE Paper 2 General Insurance Examination Quiz 05 Advanced

This question tests the understanding of ‘System of Check’ in fidelity guarantee insurance, which is crucial for internal discipline and control within an employer’s operations. The correct answer highlights the proactive measures an employer takes to prevent losses from employee dishonesty. Option B is incorrect because while reporting is part of a system, it’s not the primary focus of the ‘System of Check’ itself, which is about preventative controls. Option C is incorrect as it describes a reactive measure (investigation) rather than a preventative system. Option D is incorrect because while background checks are a component, the ‘System of Check’ encompasses a broader range of ongoing internal controls.

Fidelity Guarantee Insurance indemnifies employers against financial losses resulting from dishonest acts by their employees. The question describes a scenario where an employee’s actions led to a financial shortfall due to unauthorized transactions. This directly aligns with the core purpose of fidelity guarantee insurance, which is to cover losses arising from fraud or dishonesty by employees. Option B is incorrect because while errors can lead to financial loss, fidelity policies specifically cover intentional dishonest acts, not mere mistakes. Option C is incorrect as Public Liability insurance covers legal liabilities to third parties for injury or damage, not internal employee fraud. Option D is incorrect because Business Interruption insurance covers loss of income due to a covered peril, not direct financial loss from employee theft.

The question tests the understanding of the scope of theft insurance, specifically regarding damage to the premises during an attempted theft. According to the provided text, theft policies typically include coverage for damage caused by thieves to the insured premises when making forcible and violent entry or exit. This damage is not subject to a separate sum insured but is covered as part of the overall contents coverage. Option (a) accurately reflects this, stating that damage to the premises during forcible entry or exit is generally included. Option (b) is incorrect because while theft by staff is excluded, the question is about damage to the premises, not the theft itself by staff. Option (c) is incorrect as fire damage is explicitly excluded from theft policies. Option (d) is incorrect because while warranties are common, the question is about what is included in the scope of cover, not a condition for it.

The Code of Conduct for Insurers in Hong Kong is designed to promote good insurance practice and protect policyholders. It addresses various aspects of an insurer’s operations to ensure fair treatment and transparency. Specifically, the Code covers the insurer’s responsibilities towards customers, including their rights and interests, and also sets standards for underwriting and claims handling processes. While an insurer’s public image as a corporate citizen is important, the Code’s primary focus is on the direct conduct of insurance business and the protection of policyholders’ interests within that context. Therefore, the industry’s public image as a good corporate citizen, while a desirable outcome, is not a direct area explicitly outlined as a covered topic within the Code’s stipulated standards of good insurance practice.

Moral hazard refers to the increased likelihood of a loss occurring because an individual is insured. It’s often linked to the ‘human element,’ encompassing attitudes and behaviours. While dishonesty and fraud are extreme forms, carelessness and unreasonableness also contribute. Unreasonableness, in this context, means an insured person, despite being honest, might cause significant problems due to rigid or opinionated viewpoints, which can lead to increased claims or difficulties in managing the risk. Social behaviour, like vandalism, is also a manifestation of moral hazard. Therefore, a person who is honest but inflexible and opinionated can still present a significant moral hazard to an insurer.

This question assesses the understanding of the multifaceted impact of poor customer service on an insurance company’s operations and reputation. The “take it or leave it” approach, while seemingly a direct cost-saving measure, leads to a cascade of negative consequences. Loss of business is a direct result of customers seeking better service elsewhere. Insurance intermediaries, crucial for business generation, will withdraw support if they cannot rely on the insurer’s service quality, impacting their own productivity and willingness to promote the insurer’s products. Market prestige suffers as negative experiences spread, damaging the company’s standing among peers and the public. Finally, government intervention is a likely outcome when poor service affects consumer welfare and the reputation of Hong Kong as a financial hub, potentially leading to regulatory action. Therefore, all these are significant repercussions of neglecting customer service.

This question tests the understanding of how contract terms are classified based on their timing of operation within an insurance contract. A ‘condition precedent to liability’ is a term whose breach does not void the entire contract but specifically invalidates a particular claim. The scenario describes a situation where the insured fails to notify the insurer of a change in profession, which is a common example of a condition that, if breached, affects the insurer’s obligation to pay a specific claim rather than the contract’s existence itself. Option B describes a condition precedent to the contract, which must be met for the contract to begin. Option C describes a condition subsequent, which, if it occurs, can terminate the contract. Option D is too broad and doesn’t accurately reflect the consequence of breaching a notification clause in this context.

The Employees’ Compensation Assistance Scheme (ECAS) is designed to provide a safety net when compulsory employees’ compensation insurance is either absent or ineffective. This occurs in specific situations, such as when an employer fails to secure the required insurance coverage as mandated by the Employees’ Compensation Ordinance. The scheme is funded partly by a levy on insurance premiums, ensuring that compensation can still be provided to injured employees even if the primary insurance mechanism fails. Therefore, the primary purpose of the ECAS is to ensure that employees receive compensation when the compulsory insurance is not in place or is not functioning as intended.

The Insurance Claims Complaints Bureau (ICCB) is designed to handle disputes related to personal insurance claims. It has a jurisdictional limit of HK$800,000 for the value of the claim. Complaints exceeding this amount, or those arising from commercial, industrial, or third-party insurance, fall outside the ICCB’s purview and must be resolved through other means such as litigation or arbitration. Therefore, a dispute involving a commercial property insurance claim, regardless of its monetary value, would not be handled by the ICCB.

The question tests the understanding of specific exclusions in third-party liability cover for commercial vehicles, as distinct from private car policies. The ‘tool of trade’ clause specifically excludes liability arising from the vehicle’s use as a tool of trade, such as a mechanical digger performing its function. While compulsory insurance laws mandate certain third-party cover, this exclusion applies to the *manner* of use beyond basic road transit. Food poisoning claims and damage to stock-in-trade are also specific exclusions for certain commercial uses. Damage to roads due to vibration is another distinct exclusion. Therefore, the use of a vehicle as a tool of trade, when not mandated by statutory provisions for compulsory insurance, is a key exclusion.

This question tests the understanding of the ‘fit and proper’ requirement for insurance brokers, which is a fundamental aspect of their licensing and ongoing supervision. The Insurance Authority (IA) mandates that all insurance brokers must be fit and proper to operate. This assessment goes beyond mere technical qualifications and encompasses aspects like integrity, financial soundness, and adherence to regulatory standards. While professional indemnity insurance and maintaining proper books are crucial operational requirements, they are components that contribute to demonstrating fitness and properness, rather than being the overarching principle itself. Similarly, adherence to codes of conduct is a manifestation of being fit and proper, but not the core requirement.

Moral hazard refers to the increased likelihood of a loss occurring because an individual is insured. It encompasses the ‘human element’ of risk, including attitudes and behaviours. Dishonesty, carelessness, unreasonableness (like inflexibility or opinionated views), and negative social behaviour (such as vandalism) are all manifestations of moral hazard. While dishonesty can lead to fraud, carelessness can directly cause losses. Unreasonableness, though not necessarily dishonest, can create significant problems due to an individual’s rigid approach. Social behaviour, in its negative forms, also contributes to increased risk. Therefore, all these aspects are considered facets of moral hazard.

A ‘claims-made’ liability policy provides coverage for claims that are both made against the insured and reported to the insurer during the policy period. This contrasts with a ‘claims-occurring’ policy, which covers events that occur during the policy period, regardless of when the claim is reported. Therefore, if a claim is made after the policy has expired, even if the incident occurred during the policy term, it would not be covered under a ‘claims-made’ policy. The question specifically asks about a policy written on a ‘claims-made’ basis and a claim reported after the policy’s expiry, making the correct answer that no coverage would be provided.

The question tests the understanding of an insurer’s obligation regarding policy renewals. According to general insurance principles, an insurer is not legally mandated to remind the policyholder about an approaching renewal date. If the policyholder fails to take action, the policy simply lapses at the end of its term. Cancellation, on the other hand, implies a premature termination of coverage, which is distinct from a policy lapsing due to non-renewal. Therefore, the insurer is not obligated to provide a reminder for renewal.

A combined liability policy is designed to consolidate various liability coverages into a single document for convenience and potential premium savings. While it typically includes Public Liability, Products Liability, and Employees’ Compensation Liability, it can be extended to include other specific liability covers like Directors’ and Officers’ Liability or Professional Liability based on the client’s unique needs. The key is that it bundles multiple liability risks under one policy framework, rather than being a general umbrella policy that could encompass property or pecuniary risks. An umbrella policy is a broader category that might include liability but is not exclusively for it and is often individually designed.

The question tests the understanding of the core components typically found in a company’s published declaration of customer service standards. These declarations are designed to outline the company’s commitment to its clients and stakeholders. Option (a) correctly identifies the commitment to quality and service as a fundamental element. Option (b) refers to professional standards, option (c) to efficiency and ethics, and option (d) to claims handling, all of which are also common inclusions. However, the question asks for the most overarching and foundational commitment that underpins the others. A commitment to quality and service is the broadest statement of intent, encompassing the dedication to professional standards, efficient and ethical practices, and fair claims handling. Therefore, it serves as the primary declared intention.

This question tests the understanding of the ‘Loss of Deposits’ cover within travel insurance, as outlined in section 1.3.3 (iv). The scenario describes a situation where a pre-paid holiday becomes non-refundable due to the insured’s unexpected illness. The ‘Loss of Deposits’ cover is specifically designed to reimburse such non-refundable payments when the holiday cannot be taken due to specific, often unforeseen, personal circumstances like illness or death of the insured or a close relative. Option B is incorrect because while luggage loss is covered, it’s a separate benefit and doesn’t directly address the loss of pre-paid holiday funds. Option C is incorrect as ‘Loss of Money’ typically refers to cash or traveler’s cheques lost or stolen during the trip, not pre-paid holiday expenses. Option D is incorrect because ‘Repatriation expenses’ cover the cost of returning an injured or deceased person, which is unrelated to the loss of holiday deposits.

The question tests the understanding of the scope of theft insurance, specifically concerning damage to the premises during an attempted theft. According to the provided text, theft policies typically include coverage for damage caused by thieves to the insured premises when making forcible and violent entry or exit. This damage is not subject to a separate sum insured but is covered under the general policy for stock and specified contents. Therefore, a scenario where a thief damages a shop’s door to gain entry and subsequently steals goods would be covered for both the stolen goods and the damage to the door, provided the entry was forcible and violent.

A performance bond is a type of surety bond, not an insurance policy. Its primary function is to guarantee the fulfillment of contractual obligations, specifically in construction projects, by ensuring the work is completed within the agreed timeframe and according to specifications. If the contractor defaults, the bond provides financial security to the obligee (usually the project owner) to cover the costs of completing the project or rectifying deficiencies. Unlike insurance, which typically covers unforeseen events, a performance bond addresses the risk of a contractor’s failure to perform.

The question tests the understanding of the specific exclusions in motorcycle insurance policies concerning theft claims. Unlike private car policies, motorcycle insurance typically only covers the entire machine being stolen. Loss or damage to accessories alone, even if stolen, is generally not covered under the ‘Own Damage/Accidental Damage’ section of a motorcycle policy. This is a key distinction from broader vehicle insurance policies.

The ‘Schedule’ within a scheduled policy form is the section that contains all the specific details pertaining to the individual risk being insured. This includes crucial information such as the policy number, the insured’s particulars, the sums insured or limits of liability, the effective dates of the policy, a description of the insured subject matter, the premium paid, and any special terms, warranties, exclusions, or endorsements that modify the standard policy wording. The Recital Clause introduces the contract and references the proposal form, while the Operative Clause outlines the circumstances under which coverage is active, and General Exceptions apply to the entire contract. Therefore, identifying the policy number falls under the purview of the Schedule.

The ‘step-back system’ for No Claim Discount (NCD) in private car insurance, as described in the IIQE syllabus, dictates how a claim affects the accumulated discount. For a private car with an entitlement of four or more years (equivalent to 50% or 60% NCD), a single claim in the policy year will result in a reduction of the NCD on renewal to 20% or 30% respectively. This means the discount does not reset to zero but is significantly reduced, requiring several claim-free years to rebuild to the previous level. Options B, C, and D describe scenarios that are either incorrect (no impact from a claim, or a full reset with any claim) or apply to different vehicle types (as per the syllabus).

The core principle of an indemnity policy is to restore the insured to their pre-loss financial position. When new parts are used to repair an older vehicle, these new parts inherently offer a superior lifespan and condition compared to the original, worn-out parts. This improvement, often termed ‘betterment,’ places the insured in a financially advantageous position post-repair. Therefore, the insurer is entitled to deduct a contribution from the insured to account for this betterment, ensuring the insured does not profit from the claim. The case highlights that the insurer’s calculation of a 35% betterment contribution for an eight-year-old vehicle, while a specific depreciation rate isn’t universally defined, was deemed reasonable by the Complaints Panel, especially since the policy explicitly excluded depreciation, making the betterment contribution a necessary adjustment for the improved condition of the vehicle.

The question tests the understanding of an insurer’s obligation regarding policy renewals. According to general insurance principles, an insurer is not legally obligated to remind the policyholder about an approaching renewal date. If the policyholder fails to take action, the policy simply lapses at the end of its term. Cancellation, on the other hand, implies a premature termination of coverage, which is a distinct process with specific notice requirements. Therefore, the statement that an insurer is not required to remind the insured about renewal is accurate.

The question tests the understanding of an insurer’s obligation regarding policy renewal. According to general insurance principles, an insurer is not legally obligated to remind the policyholder about an approaching renewal date. If the policyholder fails to take action, the policy simply lapses at the end of its term. Cancellation, on the other hand, implies a premature termination of coverage, which is distinct from a policy lapsing due to non-renewal. Therefore, the statement that an insurer does not have to remind the insured about renewal is accurate.

This question tests the understanding of ‘System of Check’ in fidelity guarantee insurance, which is crucial for internal discipline and control within an employer’s operations. The correct answer highlights the proactive measures an employer takes to prevent losses from employee dishonesty. Option B is incorrect because while reporting losses is important, it’s a reactive measure, not the core of a ‘System of Check’. Option C is incorrect as it focuses on external audits, which are supplementary, not the primary internal control. Option D is incorrect because while disciplinary action is a consequence, it’s not the preventative system itself.

This question tests the understanding of how contract terms are classified based on their timing of operation within an insurance contract. A ‘condition precedent to liability’ is a term whose breach does not void the entire contract but rather invalidates a specific claim. The scenario describes a policyholder failing to notify the insurer about a change in profession, which is a common example of a condition subsequent to the contract, as it relates to an ongoing obligation during the policy term. However, the question asks about a term that, if breached, invalidates a *particular claim* without destroying the contract. A notification clause that explicitly states forfeiture of rights upon breach directly impacts the insurer’s obligation to pay a claim arising after the breach, thus fitting the definition of a condition precedent to liability. The other options represent different classifications: a condition precedent to the contract would prevent the contract from commencing, a condition subsequent to the contract might have broader implications or require specific actions to be taken, and a representation, if material and untrue, can lead to the contract being voidable, but it’s a statement made *before* the contract is formed, not a condition governing claims during its currency.

A Certificate of Insurance serves as a formal confirmation of the existence of compulsory insurance, particularly in contexts like motor vehicle insurance. It is a standalone document, distinct from the main policy, that verifies the mandatory coverage is in place. While it confirms coverage, it is not the primary document for detailing all terms and conditions, nor is it a guarantee of the insurer’s financial solvency, which is typically addressed through regulatory oversight. It also doesn’t represent a claim payment.

A cover note is a temporary document that provides immediate evidence of insurance coverage, binding the insurer even before the formal policy is issued. It is often used in motor insurance to facilitate vehicle registration and serves as proof of legally required insurance. While it offers unconditional cover, it typically includes cancellation provisions and is intended for a short duration, to be replaced by a formal policy. The question tests the understanding of the primary function and nature of a cover note in the underwriting process, distinguishing it from a policy or a certificate.

The question tests the understanding of which vessels are subject to Hong Kong insurance regulations. Specifically, it focuses on the definition of a vessel ‘regularly employed in trading to or from Hong Kong’ unless it is registered outside Hong Kong. This aligns with the provided syllabus point (xiv)(b). Option (a) correctly identifies a vessel engaged in regular trade with Hong Kong that is not registered elsewhere. Option (b) is incorrect because a pleasure craft used in Hong Kong waters is covered, but the question asks about trading vessels. Option (c) is incorrect as it describes a fishing vessel, which has its own specific criteria. Option (d) is incorrect because it refers to a vessel registered in Mainland China or Macau that is issued a certificate by a government authority of those regions permitting its trading to Hong Kong, which is a specific exclusion from the general rule.