IIQE Paper 1 Principles and Practice of Insurance Examination Quiz 79

The Employees’ Compensation Insurance Residual Scheme (ECIRS) was established to address situations where employers face difficulties securing employees’ compensation insurance, particularly for those in high-risk occupations. This scheme acts as a market of last resort, ensuring that such employers can obtain the necessary coverage. All insurers underwriting employees’ compensation insurance are mandated by market agreement to be members of the ECIRS, sharing the associated risks collectively. The operational oversight of this scheme is managed by the Employees’ Compensation Insurance Residual Scheme Bureau, which facilitates access to insurance for employers who are otherwise unable to obtain it.

The Insurance Ordinance (Cap. 41) mandates that any entity wishing to conduct insurance business in or from Hong Kong must first secure authorization from the Insurance Authority (IA). This authorization process is contingent upon meeting specific minimum requirements stipulated by the Ordinance. These requirements are designed to ensure the financial stability and operational integrity of insurers, thereby safeguarding policyholder interests. Key among these prerequisites are the levels of paid-up capital, the maintenance of a solvency margin, the suitability of directors and controllers, and the establishment of adequate reinsurance arrangements. The IA also issues supplementary Guidelines to further assess an applicant’s financial soundness and overall suitability, both at the point of authorization and on an ongoing basis.

This question tests the understanding of the fundamental difference in the nature of underwriting between life insurance and general insurance. In life insurance, underwriting is a singular, critical event because the insurer cannot cancel the policy once issued, making the initial risk assessment paramount. Conversely, general insurance policies are typically subject to renewal, allowing the insurer to re-evaluate the risk and adjust terms or even decline renewal based on performance and changing circumstances. This inherent difference in policy cancellation rights dictates the approach to underwriting. Option B is incorrect because while general insurance involves ongoing monitoring, the primary distinction lies in the insurer’s ability to alter terms at renewal, not just monitoring. Option C is incorrect as life insurance underwriting is generally more centralized due to its one-time, high-stakes nature, not less so. Option D is incorrect because while both types of insurance have guidelines, the core difference in underwriting approach stems from the policy’s non-cancellable nature in life insurance.

The question tests the understanding of the minimum net asset requirements for different types of insurance brokers in Hong Kong, as stipulated by relevant regulations. An unincorporated insurance broker is required to maintain a minimum net asset value of HK$100,000 at all times. An incorporated insurance broker has a dual requirement: a minimum net asset value of HK$100,000 and a minimum paid-up share capital of HK$100,000. The question specifically asks about an incorporated insurance broker, making the HK$100,000 paid-up capital requirement relevant.

This question tests the understanding of an insurance intermediary’s role in preventing and reporting insurance fraud, specifically concerning fraudulent claims. While an intermediary is not a law enforcement officer, they have a duty not to assist in fraud and to report suspicions. This includes being aware of suspicious circumstances, questionable documentation, or verbal cues that suggest a claim might be fraudulent. The key is to assist the insurer and the law in combating fraud, but with sensitivity, as the insurer is primarily responsible for investigating and alleging fraud. Option (a) correctly identifies the intermediary’s obligation to report suspicions, while (b) and (c) describe actions that could be considered assisting fraud or overstepping their role. Option (d) is too passive and doesn’t address the proactive reporting aspect.

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. 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 company’s marketing for another company’s marketing constitutes a change in purpose and is not a fair means of collection, as it involves unauthorized copying and use of proprietary customer information. The guidance note specifically advises against copying customer information when changing employment to prevent such misuse.

The Personal Data (Privacy) Ordinance (PDPO) in Hong Kong is designed to protect the privacy of individuals by regulating the collection, holding, processing, and use of personal data. Its scope is broad and encompasses both the public sector and the private sector. This means that government departments, statutory bodies, as well as companies and individuals in the private sector, are all subject to the provisions of the PDPO when they handle personal data. Therefore, the Ordinance applies to all entities that collect and process personal data, regardless of whether they operate in the public or private domain.

An insurance broker, by holding themselves out as an expert, owes a higher duty of care to their clients. This means they must exercise reasonable skill and diligence when advising clients. Failure to do so, leading to a client’s loss, can constitute professional negligence. Unlike insurance agents, who primarily represent the insurer and may not profess the same level of expertise to policyholders, brokers are expected to act in the best interests of the policyholder, who is their client. This elevated responsibility necessitates professional indemnity insurance to cover potential claims arising from such negligence.

Insurable interest is a fundamental principle in insurance, requiring the policyholder to have a legitimate financial stake in the subject matter of the insurance. This interest must exist at the time of the loss for indemnity insurance, but for life insurance, it is only required at the policy’s inception. A property management company, acting as an agent for building owners, can secure insurance for the building. While the property management company might be named as the insured in the policy, their insurable interest is derived from the principal (the building owners) they represent. Therefore, if the property management company procures insurance on behalf of the owners, and the owners have an insurable interest, the policy is valid even if the property management company itself doesn’t have direct ownership. The question tests the understanding of how insurable interest can be derived through agency relationships in property insurance.

The Insurance Ordinance mandates that authorized insurers maintain adequate reinsurance arrangements. This is a critical component of an insurer’s financial security and is subject to supervisory review by the IA regarding both the quantity and the collectability of the reinsurance. The IA has specific guidelines, such as the ‘Guideline on Reinsurance with Related Companies,’ to address potential conflicts of interest and ensure the protection of policyholders when reinsurance is placed with affiliated entities. Therefore, ensuring the quality and collectability of reinsurance is a fundamental regulatory requirement.

The question tests the understanding of the primary function of insurance as a risk transfer mechanism. While insurance does contribute to employment, financial services, and economic development, its core purpose is to shift the potential financial burden of a loss from an individual or entity to an insurer in exchange for a premium. The other options represent ancillary benefits or broader economic impacts, not the fundamental role of insurance itself.

The Insurance Authority (IA) has the power to intervene in an insurer’s operations to protect policyholders. One such power, as outlined in the provided text, is the limitation of premium income. This measure can be implemented if the IA believes an insurer is expanding too rapidly, potentially leading to difficulties in managing the liabilities associated with new business. The other options, while related to regulatory actions, are not specifically listed as direct intervention powers in the context of managing rapid growth or potential difficulties arising from it. Restrictions on investments, custody of assets by a trustee, and special actuarial investigations are also intervention powers, but the limitation of premium income is the most direct response to concerns about rapid expansion and its associated liabilities.

The Code of Practice for the Administration of Insurance Agents defines an ‘Insurance Agent’ as a person who holds themselves out to advise on or arrange contracts of insurance in or from Hong Kong 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, it specifically excludes individuals who are solely serving as Responsible Officers or Technical Representatives of an insurance agent, as their roles are defined in relation to the agency itself, not as independent agents.

This question tests the understanding of vicarious liability in the context of data protection. Under the Personal Data (Privacy) Ordinance (PDPO), a data user is generally held responsible for the actions of their data processor when personal data is outsourced. The Ordinance specifies that the data subject may seek recourse from the data user, who is liable as the principal for the wrongful acts of their authorized data processor. While the data processor is not directly liable to the data subject, the data user remains accountable. The contract between the data user and data processor can serve as evidence of compliance, but it does not absolve the data user of their primary responsibility to the data subject. Therefore, the data user is liable for the data processor’s contravention.

The core principle here is that financial institutions (FIs) must have robust internal controls to prevent their employees, including appointed insurance agents, from ‘tipping off’ customers or others about suspicious activity investigations. This involves training staff to recognize unusual transactions by understanding normal customer behavior and transaction patterns. If an FI suspects a transaction relates to money laundering or terrorist financing (ML/TF), their customer due diligence (CDD) process must be conducted with extreme care to avoid inadvertently revealing this suspicion. The guideline emphasizes that staff awareness and sensitivity to the risk of tipping off are crucial during CDD. Therefore, the most accurate statement is that FIs must implement systems and provide guidance to staff to prevent tipping off during CDD processes, especially when suspicions of ML/TF arise.

The Insurance Ordinance in Hong Kong strictly prohibits an individual from simultaneously holding the roles of an appointed insurance agent and an authorised insurance broker. This is to prevent conflicts of interest and maintain clear lines of responsibility within the insurance industry. Therefore, if Mr. Chan is an authorised insurance broker, he cannot also be an appointed insurance agent for any insurer, regardless of whether he is advising the same or different clients.

The question tests the understanding of the primary function of insurance as a risk transfer mechanism. While insurance does contribute to employment, financial services, and economic development, its core purpose is to shift the potential financial burden of a loss from an individual or entity to the insurer in exchange for a premium. The other options represent ancillary benefits or broader economic impacts, not the fundamental role of insurance.

The Insurance Companies Ordinance (Cap. 41) mandates that insurance brokers maintain records that adequately explain all transactions, accurately reflect their financial standing, and facilitate the preparation of financial statements that present a true and fair view. These records must also be suitable for auditing. The requirement to retain these records for a minimum of seven years is a key regulatory obligation to ensure accountability and facilitate investigations or audits over an extended period. Options B, C, and D describe aspects of record-keeping but do not encompass the full scope of the regulatory requirements or the specific retention period.

Guidance Note 4 (GN4) issued by the IARB (now part of HKFI) provides specific directives for insurance agents to uphold integrity and protect policyholders. A key requirement is that agents must not accept blank or incomplete proposal forms from clients. Any necessary amendments to a form must be initialed by the customer to ensure transparency and prevent unauthorized alterations. This practice safeguards against misrepresentation and potential fraud, aligning with the overarching principle of conducting business in good faith and with integrity as stipulated in the Code of Practice for the Administration of Insurance Agents.

Contribution between insurers applies when multiple policies cover the same loss. For contribution to be applicable, several conditions must be met. These include that each policy must provide an indemnity, cover the same interest affected, cover the same peril causing the loss, cover the same subject matter, and each policy must be liable for the loss (i.e., not subject to an exclusion that prevents contribution). In the scenario, while both policies cover the same peril (fire) and the same subject matter (stock-in-trade), they cover different interests: the merchant’s interest as owner and the warehouse operator’s interest as bailee. Therefore, criterion (b) – covering the same interest – is not met, and contribution will not apply between the insurers.

The Insurance Claims Complaints Bureau (ICCB) has a panel that can make an award against an insurer. This panel has the authority to award compensation up to HK$800,000. Crucially, the insurer against whom the award is made does not have the right to appeal this decision. However, the complainant, if dissatisfied with the award, retains the option to pursue legal recourse. Therefore, the maximum monetary award an insurer cannot appeal is HK$800,000.

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. This prevents the insured from recovering twice for the same loss and ensures that the party at fault bears the ultimate financial responsibility. The insurer’s right to subrogation is limited to the amount it has paid out as indemnity. Therefore, if the insured has an uninsured interest in the property or has not been fully indemnified, the insurer’s subrogation rights are correspondingly limited.

The Insurance Authority (IA) is responsible for ensuring that individuals appointed as registered persons are fit and proper. When an applicant is undergoing the registration process, the appointing Principal or Insurance Agent has a duty to inform the IA of any changes in the applicant’s circumstances that might impact the IA’s assessment. This proactive disclosure is crucial for maintaining the integrity of the registration system. Failure to provide such information when requested, or to report significant changes, can lead to the IA not considering the application or even taking disciplinary action against the appointing party.

The principle of insurable interest is fundamental to the validity of an insurance contract. It requires the policyholder to have a legally recognized relationship with the subject matter of the insurance, such that they would suffer a financial loss if the insured event occurs. Without this connection, the contract is void. For instance, a person has an insurable interest in their own life, their spouse’s life, or property they own. A creditor might have an insurable interest in a debtor’s life, but not necessarily in the debtor’s property unless it’s collateral. The scenario describes a situation where a person is insuring a valuable antique vase that they have agreed to purchase but have not yet taken possession of. Since the contract of sale is in place, and they will suffer a financial loss if the vase is damaged before they receive it, they have a legally recognized financial interest in its preservation. Therefore, they possess insurable interest.

Participating policies, also known as with-profit policies, offer policyholders a share in the insurer’s profits. These profits are typically distributed in the form of bonuses, which can be reversionary (added to the sum assured and payable on claim) or cash bonuses. The distribution of these bonuses is a key feature of participating business and is determined by the insurer’s financial performance, including investment returns, mortality experience, and operating expenses. The question tests the understanding of how profits from participating policies are shared with policyholders, which is primarily through bonuses. Option B is incorrect because while dividends are a form of profit distribution, they are more commonly associated with shares in a company rather than the direct profit-sharing mechanism within a participating life insurance policy. Option C is incorrect as policyholders do not directly manage the insurer’s investments; their share of profits is an outcome of the insurer’s management. Option D is incorrect because while policyholders contribute to the insurer’s capital, the distribution of profits is based on the performance of the participating fund, not a direct return of capital contributions.

Contribution between insurers applies when multiple policies cover the same loss. For contribution to be applicable, several conditions must be met. These include that each policy must provide an indemnity, cover the same interest affected, cover the same peril causing the loss, cover the same subject matter of insurance, and each policy must be liable for the loss (i.e., not subject to an exclusion that prevents contribution). In the scenario provided, the merchant’s fire insurance covers their interest as owner, while the warehouse operator’s fire insurance covers their interest as a bailee. Since these are different interests, contribution between the insurers will not apply, even though both policies cover the same property and the same peril. Therefore, the insurer of the merchant would be responsible for the full amount of the merchant’s loss, subject to the policy’s terms and conditions, and would then potentially pursue subrogation against the warehouse operator’s insurer if applicable.

The scenario describes a situation where a customer is seeking clarification on policy terms and requesting a duplicate document. According to the provided syllabus, the Customer Servicing department is responsible for handling various types of enquiries, including those seeking guidance and information, as well as requests for documentation like duplicate policies. While public relations and marketing are also mentioned, they are distinct functions. Complaints handling is a separate, albeit related, responsibility. Therefore, the primary responsibility for addressing these customer needs falls under Customer Servicing.

This question tests the understanding of the core functions within an insurance company and the division of responsibilities. The Accounts department is primarily concerned with financial transactions, record-keeping, and managing the company’s monetary assets and liabilities. Activities like determining risk insurability fall under the purview of underwriting, which involves assessing the likelihood and severity of potential losses. Similarly, the strategic decision-making and market analysis required for launching a new policy product are typically handled by product development, marketing, or actuarial departments, not the accounts department. While the accounts department might be involved in the financial aspects of a new product launch (e.g., budgeting), the core responsibility of determining its viability and design rests elsewhere. Therefore, identifying insurability and arranging new product launches are not the primary duties of the accounts department.

The scenario highlights a situation where a Hong Kong-incorporated financial institution (FI) has an overseas subsidiary that cannot comply with Hong Kong’s Customer Due Diligence (CDD) and record-keeping requirements due to local legal prohibitions. According to the provided guidelines (specifically section 7.4.6c), when an overseas branch or subsidiary is unable to comply with requirements similar to those in Parts 2 and 3 of Schedule 2 of the AMLO due to local laws, the FI has two primary obligations. First, it must inform its relevant authority (RA) of this non-compliance. Second, it must implement additional measures to effectively mitigate the Anti-Money Laundering/Counter-Terrorist Financing (AML/CFT) risks arising from this inability to comply. The options provided test the understanding of these two crucial steps. Option A correctly identifies both informing the RA and taking additional risk mitigation measures. Option B is incorrect because while informing the RA is necessary, it doesn’t address the risk mitigation aspect. Option C is incorrect as it suggests ceasing operations, which is not the mandated action; the guideline focuses on managing the risk within the existing structure. Option D is incorrect because while seeking legal advice might be part of the process, it’s not the direct regulatory requirement outlined for this specific situation; the core requirements are informing the RA and implementing enhanced controls.

The Insurance Authority (IA) mandates specific criteria for individuals and bodies seeking to operate as insurance brokers in Hong Kong. To be authorized, an individual or a body must either obtain direct authorization from the IA or become a member of a body of insurance brokers that has been approved by the IA. This ensures a regulated framework for the insurance broking industry, upholding standards of professionalism and client protection. The IA’s approval process for bodies of insurance brokers involves verifying their adherence to statutory provisions and the maintenance of robust internal rules and regulations, including membership eligibility, conduct codes, and disciplinary procedures, to ensure their members meet the IA’s minimum requirements.