IIQE Paper 2 General Insurance Examination Quiz 09 Advanced

This question assesses the understanding of the positive impacts of excellent customer service in the insurance industry, specifically focusing on how satisfied customers contribute to business growth. Customer loyalty, driven by positive experiences, leads to repeat business through renewals. Furthermore, happy customers are more likely to recommend the insurer to others, generating new business via word-of-mouth, which is a highly effective and cost-efficient marketing strategy. This increased business volume and reduced acquisition costs directly contribute to enhanced profitability. The other options, while potentially related to business operations, do not directly capture the positive feedback loop of customer satisfaction leading to increased business generation as effectively as the correct answer.

Average adjusters are specialists in marine insurance, particularly in the complex area of General Average (GA) claims. Their expertise is crucial due to the intricate legal knowledge required (international and national maritime laws), the large number of parties often involved (e.g., numerous cargo owners), and the lengthy investigation periods typically needed to settle these claims. While Lloyd’s Agents and Loss Adjusters are also involved in claims handling, average adjusters are specifically retained for the unique complexities of GA, and sometimes for complicated hull or cargo losses, distinguishing them from the more general roles of the others.

The question probes the understanding of prohibited practices in the insurance intermediary sector, specifically concerning rebating. Rebating, in essence, is the practice of offering inducements or discounts on premiums or commissions to policyholders or potential clients that are not explicitly stated in the policy contract. This practice is considered unethical and potentially illegal because it distorts the true cost of insurance, creates an unfair competitive advantage, and can be a precursor to bribery and corruption. The Insurance Companies Ordinance (Cap. 41) and associated codes of practice, such as the Code of Practice for the Administration of Insurance Agents, strictly regulate such activities. Offering a portion of the commission to an employee of the insured without the insured’s explicit written consent falls directly under the definition of an unauthorized rebate. This is because it provides a financial benefit to an individual associated with the policyholder that is not available to all policyholders and is not part of the standard commission structure. Such an action undermines the principle of fair dealing and can lead to conflicts of interest, as the employee might be influenced to recommend a particular insurer or policy based on personal gain rather than the best interests of their employer (the insured). Therefore, this action is prohibited.

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.

This question tests the understanding of the Insurance Claims Complaints Bureau (ICCB) in Hong Kong, a key dispute resolution mechanism for insurance policyholders. The ICCB scheme is designed to provide an accessible and cost-effective avenue for resolving disputes between policyholders and insurers. It is crucial to understand the scope of its applicability, the nature of its services, and the limitations on its awards. Specifically, the ICCB scheme covers both personal and general insurance claims, not just personal ones. The service is free for complainants, aligning with its objective of accessibility. While the ICCB makes recommendations, its awards are not legally binding on the insurer, and the complainant can choose to accept or reject the award. If the complainant accepts the award, the insurer is bound by it. However, the insurer can appeal against an award made by the ICCB. The maximum claim amount that can be referred to the ICCB is HK$1,000,000, not HK$800,000. Therefore, only the statement that the complainant is never charged a fee for this service is accurate.

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, aged parts. This improvement in the vehicle’s condition beyond its pre-accident state is termed ‘betterment’. The insurer is not obligated to provide a benefit that exceeds the original state. Therefore, a contribution from the insured towards the cost of these new parts is justified to account for this betterment, ensuring the insured does not gain an advantage. The scenario highlights that the insurer’s calculation of a 35% betterment contribution for an eight-year-old vehicle was deemed reasonable, especially when compared to a standard 50% depreciation rate for such a vehicle, and was consistent with the policy’s exclusion of depreciation claims.

The scenario describes an individual injured while ice-skating. The insurer denied the claim based on an exclusion for ‘winter-sports’. The Complaints Panel, in interpreting this exclusion, determined that ‘winter-sports’ generally encompass activities on snow or ice, regardless of the season or whether the activity is indoors or outdoors. Therefore, ice-skating, even indoors, falls under this category. The key principle here is the broad interpretation of exclusion clauses by regulatory bodies when a specific definition is not provided in the policy, focusing on the nature of the activity itself. This aligns with the understanding that policy exclusions are often interpreted in favour of the insurer when ambiguity exists, especially concerning hazardous activities.

This question tests the understanding of the ‘System of Check’ in fidelity guarantee insurance. This system is crucial for an employer to maintain internal discipline and control over employees who are guaranteed against dishonesty. Option A correctly identifies this purpose. Option B is incorrect because while underwriting involves assessing risk, the ‘System of Check’ is a specific internal control mechanism, not the entire underwriting process. Option C is incorrect as ‘Transparency’ relates to public awareness and fairness, not internal employee controls. Option D is incorrect because ‘Trend Adjustment’ is a method used in business interruption claims to account for external factors affecting loss calculations, unrelated to fidelity insurance controls.

Institute Cargo Clauses (A) provides the broadest coverage, operating on an ‘all risks’ basis. This means it covers all losses unless specifically excluded. Clauses (B) and (C) are more restrictive, covering only specified perils. Therefore, a shipment insured under Clause (A) would be covered for damage caused by a sudden, unexpected event like a storm, provided it’s not an excluded peril. Clause (B) would cover it if ‘storm’ was a listed peril, and Clause (C) would only cover it if it fell under a very narrow set of specifically named causes of loss, which is unlikely for general storm damage.

The Motor Vehicles Insurance (Third Party Risks) Ordinance mandates compulsory third-party motor insurance in Hong Kong. This ordinance ensures that victims of motor accidents have a legal recourse for compensation for bodily injury or death caused by a motor vehicle, regardless of the driver’s fault. While other options relate to insurance, they do not specifically address the foundational legal requirement for third-party motor insurance in Hong Kong.

Institute Cargo Clauses (A) provides the broadest coverage, operating on an ‘all risks’ basis. This means it covers all losses unless specifically excluded by the policy. Clauses (B) and (C) are more restrictive, covering only a defined list of perils. Therefore, a shipment insured under Clause (A) would be protected against a wider array of potential damages compared to shipments insured under Clauses (B) or (C), assuming the loss is not an explicitly excluded peril.

The scenario describes a situation where an insured event (dropping a watch) occurred, and the insured took action to mitigate further loss by getting it repaired. However, the claim was lodged after the repair was completed, two weeks after the incident. According to general insurance principles and common policy conditions, prompt notification of a potential claim is crucial. While the insured did take the watch for repair, the delay in formally notifying the insurer about the incident and the subsequent claim, after the repair was already done, could be problematic. The insurer needs to be informed of a potential claim as soon as reasonably practicable to investigate the circumstances, assess the damage, and potentially approve the repair or offer an alternative solution. Lodging the claim after the repair is completed, without prior notification, might be seen as a breach of the ‘notification to the insurer’ condition, which typically requires reporting the incident promptly. This delay could potentially affect the insurer’s ability to properly assess the claim and could lead to its rejection or a reduction in the payout, depending on the specific policy wording and the insurer’s discretion. The question tests the understanding of the importance of timely notification as a policy condition affecting claims, as outlined in section 3.1.3 (a) of the provided text.

A voluntary excess, also known as a ‘self-insured retention’ or ‘excess requested by the insured’, is an amount that the policyholder agrees to bear themselves in the event of a claim. This is typically offered by insurers as a mechanism to reduce the premium payable by the insured. The insured chooses a higher excess amount in exchange for a lower premium. This is in addition to any compulsory excess that might apply to the policy, such as a young driver excess or a specific excess for certain types of claims. Therefore, the core purpose of a voluntary excess is to provide a premium discount to the policyholder.

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 policy requiring the insured to report a change in profession. Failure to do so, as stipulated, would mean the insurer is not liable for any claims arising from that changed profession, even if the policy itself remains in force for other purposes. This aligns with the definition of a condition precedent to liability, as it specifically affects the insurer’s obligation to pay a claim rather than the contract’s existence.

The question tests the understanding of the core components typically found in a company’s published declaration of service standards, as outlined in the provided text. These declarations serve as a benchmark for customer expectations and a measure of the company’s performance. Option (a) correctly identifies the commitment to quality and service as a fundamental element of such declarations. Options (b), (c), and (d) represent specific aspects that might be included, but the overarching commitment to quality and service is the most encompassing and primary promise. The text explicitly mentions a “commitment to quality and service” as a typical inclusion in these documents.

This question tests the understanding of the relationship between material damage insurance and business interruption (BI) insurance, specifically the ‘material damage proviso’ in BI policies. This proviso stipulates that a claim under a BI policy is contingent upon a valid claim being payable under the associated material damage policy for the same insured event. If the material damage policy does not cover the physical loss or damage, or if it’s invalid, the BI policy will not respond. Therefore, a business interruption policy is fundamentally linked to the existence and validity of the underlying material damage cover for the insured peril.

A Scheduled Policy Form is a common structure where the policy details, such as the insured’s name, the property covered, the sum insured, and the premium, are listed in a schedule attached to the policy document. This schedule forms an integral part of the contract. The Signature Clause, also known as the Attestation Clause, is a specific section within this scheduled policy form where the insurer formally signifies their agreement and undertaking to the terms outlined in the policy. While a simple contract can be verbal or inferred from conduct, and specific exclusions are tailored to individual risks, and settling agents are appointed for marine claims, the Signature Clause is the direct confirmation of the insurer’s commitment within the scheduled policy framework.

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 this category. Option (b) is incorrect because a vessel used for pleasure purposes is covered under (xiv)(c). Option (c) is incorrect as it describes a vessel employed in sea fishing, covered under (xiv)(d). 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 under (xiv)(e).

The Insurance Companies Ordinance (ICO) establishes stringent requirements for insurers to ensure their financial stability and operational integrity. These include mandates for authorization, minimum capital levels, maintaining adequate solvency margins, and ensuring that directors and controllers meet ‘fit and proper’ standards. Furthermore, it requires insurers to have appropriate reinsurance arrangements. These measures collectively aim to safeguard policyholders and maintain public confidence in the insurance sector, directly contributing to the economic and social viability of insurance providers, which in turn supports customer service by ensuring the insurer’s ability to meet its obligations.

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 this category. Option (b) is incorrect because a vessel used for pleasure purposes is covered under (xiv)(c). Option (c) is incorrect as it describes a vessel employed in sea fishing, covered under (xiv)(d). 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 under (xiv)(e).

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.

Moral hazard refers to the increased likelihood of a loss occurring because the insured party has protection against that loss. This can manifest in various ways, including dishonesty (fraud), carelessness leading to accidents, unreasonableness in decision-making that exacerbates risk, or negative social behaviour like vandalism. While dishonesty is a direct form of moral hazard, carelessness and unreasonableness are also significant contributors to increased risk due to the insured’s attitude or behaviour, which is often referred to as the ‘human element’ in insurance underwriting. Therefore, all these aspects contribute to moral hazard.

The Employees’ Compensation Assistance Scheme (ECAS) is designed to provide a safety net when an employer’s compulsory employees’ compensation insurance is absent or ineffective. It is funded partly by a levy on insurance premiums. Therefore, if an employer fails to secure the mandatory insurance, the ECAS steps in to ensure employees receive compensation for work-related injuries or diseases, fulfilling the spirit of the Employees’ Compensation Ordinance.

This question tests the understanding of the distinction between ‘Specified Perils’ and ‘All Risks’ cover in property insurance, as outlined in the IIQE syllabus. ‘Specified Perils’ cover only losses caused by events explicitly listed in the policy, requiring the claimant to prove the cause of loss. ‘All Risks’ cover, conversely, covers all accidental losses unless specifically excluded, shifting the burden of proof to the insurer to demonstrate an exclusion applies. The scenario describes a situation where a loss occurred, and the claimant is unable to identify the exact cause. Under ‘Specified Perils’ cover, this would likely result in a denied claim because the claimant cannot prove the loss was due to a named peril. However, under ‘All Risks’ cover, the claimant only needs to prove that an accidental loss occurred, and the insurer would then need to prove an exclusion applies. Therefore, the ‘All Risks’ policy is more advantageous in this specific situation.

The question tests the understanding of policy conditions, specifically the ‘Average’ condition. The Average clause is a penalty for under-insurance. If the sum insured is less than the value of the property at the time of loss, the insurer will only pay a proportion of the loss, calculated based on the ratio of the sum insured to the actual value. In this scenario, the property’s value is HK$500,000, but it is insured for only HK$300,000. The loss is HK$100,000. Applying the Average clause, the insurer will pay (Sum Insured / Value of Property) * Loss = (HK$300,000 / HK$500,000) * HK$100,000 = 0.6 * HK$100,000 = HK$60,000. Therefore, the insured will bear the remaining HK$40,000.

This question tests the understanding of the ‘claims-made’ basis for liability insurance policies, a concept crucial for understanding how coverage is triggered. Under a claims-made policy, the claim must be made against the insured during the policy period or a specified extended reporting period for coverage to apply. This contrasts with ‘occurrence’ policies, where the event causing the claim must have occurred during the policy period, regardless of when the claim is reported. Therefore, the defining characteristic of a claims-made policy is the timing of the claim’s notification.

The question tests the understanding of the basis of cover for Public Liability (PL) insurance. The provided text explicitly states that PL insurance is usually written on a ‘claims-occurring’ basis, meaning that the policy covers incidents that occur during the policy period, regardless of when the claim is actually made. While ‘claims-made’ policies are not unknown, they are not the common practice for PL insurance. Therefore, a claim arising from an accident that happened within the policy year, even if reported after the policy has expired, would typically be covered under a claims-occurring policy, provided the notification requirements are met.

The question probes the understanding of prohibited practices in insurance intermediary business, specifically concerning rebating. Rebating, in this context, refers to offering inducements or benefits to policyholders or potential policyholders that are not explicitly stated in the policy contract. This practice is considered unethical and potentially illegal because it distorts the true cost of insurance, undermines fair competition, and can be a form of bribery or corruption. The Insurance Companies Ordinance (Cap. 41) and associated codes of practice, such as the Code of Practice for the Administration of Insurance Agents, strictly regulate such activities. Offering a portion of the commission to an employee of the insured without the insured’s explicit written consent is a direct violation of these regulations, as it constitutes an unauthorized rebate and can be seen as an attempt to improperly influence the placement of business. This practice compromises the integrity of the insurance transaction and the professional conduct expected of intermediaries.

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 distinct, permanent document that stands apart from the main policy document. This certificate is crucial for demonstrating compliance with legal requirements for mandatory insurance coverage.

A ‘Condition Precedent to the Contract’ is a term that must be fulfilled for the insurance agreement to become effective. Failure to meet this condition means the contract never legally begins. In contrast, a ‘Condition Precedent to Liability’ relates to a term whose breach invalidates a specific claim, but the contract itself may still be in force. A ‘Condition Subsequent to the Contract’ is a term that must be adhered to during the policy’s currency, but its breach does not necessarily invalidate the entire contract, only potentially affecting claims or renewals. ‘Consequential Loss’ refers to indirect financial losses resulting from an insured event, which are typically excluded from property insurance unless specifically covered under a business interruption policy.