IIQE Paper 1 Principles and Practice of Insurance Examination Quiz 78

The Insurance Authority (IA) has the power to impose further disciplinary or other actions on a Principal or Registered Person, including the respondent’s appointing Insurance Agent, if they fail to comply with a requirement to take disciplinary or other action. This is a direct consequence outlined in the regulatory framework for insurance intermediaries, specifically addressing non-compliance with disciplinary directives. The IA’s role is to ensure adherence to the Code of Conduct and to maintain market integrity. Therefore, reporting such failures and imposing further sanctions are within its purview to enforce compliance.

This question tests the understanding of subrogation, specifically how it operates when an insurer has only partially indemnified a loss due to policy limitations. According to the principles of subrogation, if an insurer pays only a portion of a loss (e.g., due to a deductible or a policy limit), and the insured recovers an amount from a third party that covers the entire loss, the insurer is entitled to a portion of that recovery. This portion is typically proportional to the insurer’s contribution to the loss. The insured, having borne a part of the loss themselves, retains the right to any recovery that exceeds the total amount paid by both the insurer and the insured. Therefore, the insurer can only recover up to the amount they have paid out, and any excess belongs to the insured. Option B is incorrect because it suggests the insurer can claim the entire recovery, ignoring the insured’s retained interest. Option C is incorrect as it implies the insurer can claim more than they paid, which contradicts the principle of indemnity. Option D is incorrect because it suggests the insured has no claim to any recovery, which is only true if the insurer fully indemnified the loss and the recovery is less than or equal to the insurer’s payout.

The question tests the understanding of the minimum paid-up capital requirements for authorized insurers in Hong Kong, specifically for a captive insurer. According to the provided text, a captive insurer has a minimum paid-up capital requirement of HK$2 million. The other options represent different scenarios or incorrect figures. HK$20 million is for carrying on both General and Long Term business, HK$10 million is the minimum for General Business (unless carrying on statutory insurance business), and HK$5 million is not a specified minimum capital requirement in the provided context.

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, 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 relevant ordinance because local laws prevent it, the FI has two primary obligations. First, it must inform its relevant authority (RA) about this non-compliance. Second, it must implement additional measures to effectively mitigate the Anti-Money Laundering and Counter-Terrorist Financing (AML/CFT) risks that arise from this inability to adhere to the specified Hong Kong standards. This ensures that even with local legal constraints, the FI actively manages the heightened risks.

The question tests the understanding of market concentration in Hong Kong’s insurance sector, specifically differentiating between General Business and Long Term Business. The provided text states that for General Business, the top ten insurers held a 42% market share, with no single insurer exceeding 17% in any class. In contrast, for Long Term Business, the top ten insurers accounted for 75% of the market, the top five for 55%, and the top one for 16%. This indicates a significantly higher concentration in Long Term Business compared to General Business, where the market is more evenly distributed among authorized insurers. Therefore, the statement that Long Term Business exhibits greater market concentration than General Business is accurate based on the provided statistics.

The duty of utmost good faith, which includes the duty of disclosure, generally applies to material facts known to the proposer before the contract is concluded. However, this duty can be extended or modified by the policy terms. In this scenario, the policy explicitly requires disclosure of material changes in risk during the policy’s term. The insured’s change in occupation, which increases the risk, falls under this clause. Therefore, the insured is obligated to inform the insurer about this change immediately, not just at renewal, as per the policy’s specific wording. This aligns with the principle that policy terms can override or supplement common law duties regarding disclosure duration.

The Insurance Agents Authority (IAA) is responsible for overseeing the conduct of insurance agents and related personnel in Hong Kong. The Insurance Authority (IA) is the statutory body that regulates the insurance industry. The Insurance Agents Registration Board (IARB) is a body established under the purview of the Hong Kong Federation of Insurers (HKFI) to administer the registration of insurance agents, responsible officers, and technical representatives according to the Code of Conduct. Therefore, while the IA is the ultimate regulator, the IARB is the entity directly involved in the registration and disciplinary processes as outlined in the provided text. The HKFI is the industry association that oversees the IARB’s functions.

Terrorist financing, as defined by relevant legislation, involves the provision or collection of property with the intention or knowledge that it will be used, in whole or in part, to commit terrorist acts. This can occur even if the property is not ultimately used for such purposes. Option (b) describes making property or services available to a known or suspected terrorist or associate, which is also a form of terrorist financing. Option (c) focuses on the collection or solicitation of funds for such individuals. However, the core definition of terrorist financing encompasses the intent and use of property for terrorist acts, making option (a) the most comprehensive and direct definition.

This question tests the understanding of vicarious liability in the context of data protection under Hong Kong law. The Personal Data (Privacy) Ordinance (PDPO) holds data users responsible for the actions of their data processors. Therefore, if a data processor infringes on a data subject’s privacy, the data subject can seek recourse from the data user, who is considered liable as the principal for the data processor’s wrongful acts. 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. The data processor itself is not directly liable to the data subject for infringing their privacy.

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 suspicious claims, while (b) and (c) describe actions that could be considered assisting fraud or overstepping their role. Option (d) is too passive and doesn’t reflect the proactive duty to report.

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 providing a true and fair view. These records must also be suitable for auditing. Specifically, they need to detail all dealings with insurers, clients, and the broker themselves, track all income and expenses (including brokerage, commissions, and interest), and list all assets and liabilities. The requirement for retention is a minimum of 7 years. Option (a) correctly encapsulates these core requirements for record-keeping.

This question tests the understanding of vicarious liability in the context of data protection under Hong Kong law. The Personal Data (Privacy) Ordinance (PDPO) holds data users responsible for the actions of their data processors. Therefore, if a data processor infringes on a data subject’s privacy, the data subject can seek recourse from the data user, who is considered liable as the principal for the data processor’s wrongful acts. 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. The data processor itself is not directly liable to the data subject for infringing their privacy.

This question tests the understanding of an insurance intermediary’s role in preventing corruption and fraud, specifically referencing the ICAC’s initiatives and the ‘Practical Guide on Professional Ethics for Life Insurance Intermediaries’. The ICAC provides free, confidential services, including best practice packages and advice, to help organizations prevent corruption. For the insurance industry, they offer training and have collaborated on a guide to enhance ethical conduct and reduce regulatory violations. Therefore, familiarizing oneself with the ICAC’s resources and the ethical guide is a proactive step for intermediaries to uphold professional standards and prevent misconduct.

The question tests the understanding of the renewal period for an Officer/Technical Representative’s registration. According to the provided syllabus, the registration for an Officer/Technical Representative must be renewed not earlier than three months before its expiry. This ensures that the renewal process is initiated within a timely manner, allowing for the continued validity of their appointment and adherence to regulatory requirements, including the ‘fit and proper’ criteria and Continuing Professional Development (CPD) obligations.

This question tests the understanding of subrogation, specifically how it operates when an insurer has only partially indemnified a loss due to policy limitations. According to the principles of subrogation, if an insurer pays only a portion of the loss because of policy terms (e.g., a deductible or a limit on coverage), and the insured recovers an amount from a third party that covers the entire loss, the insurer is entitled to a portion of that recovery. This portion is typically proportional to the insurer’s contribution to the loss. The insured retains any amount recovered that exceeds the total loss and the insurer’s payout. Therefore, if the insurer paid HK$80,000 on a HK$100,000 loss, and the insured recovers HK$90,000 from a negligent third party, the insurer is entitled to HK$80,000 of that recovery, leaving the insured with HK$10,000 from the third party. The insured would then have received a total of HK$90,000 (HK$80,000 from insurer + HK$10,000 from third party), which is less than the total loss of HK$100,000. The remaining HK$10,000 of the loss would be borne by the insured. The insurer cannot claim the full HK$90,000 because their payout was only HK$80,000. The insured cannot keep the entire HK$90,000 because the insurer has a right to recover their payout.

This question tests the understanding of subrogation, specifically how it operates when an insurer has only partially indemnified a loss due to policy limitations. According to the principles of subrogation, if an insurer pays only a portion of the loss because of policy terms (e.g., a deductible or a limit on coverage), and the insured recovers an amount from a third party that covers the entire loss, the insurer is entitled to a proportionate share of that recovery. This proportionate share is based on the ratio of the insurer’s payment to the total loss. The insured retains any recovery exceeding the total loss, and if the recovery is less than the total loss but more than the insurer’s payment, the insured would receive the remainder after the insurer is made whole. Therefore, the insurer’s recovery is limited to the amount they paid, and any excess recovery belongs to the insured. The scenario describes a situation where the insurer paid HK$50,000 on a HK$100,000 loss, meaning they indemnified 50% of the loss. When the insured recovers HK$80,000 from the negligent third party, the insurer is entitled to 50% of this recovery, which is HK$40,000. The insured would then receive the remaining HK$40,000 from the third party, plus the HK$50,000 the insurer paid, totaling HK$90,000. However, the question asks what the insurer can recover, which is limited to their payout. The insurer paid HK$50,000, and the recovery from the third party is HK$80,000. The insurer’s subrogated right is to recover the amount they paid, which is HK$50,000. Since the third-party recovery (HK$80,000) is sufficient to cover the insurer’s payout (HK$50,000) and still leave a balance for the insured, the insurer can recover the full amount they paid.

The Insurance Ordinance strictly prohibits an individual from simultaneously holding the roles of an appointed insurance agent and an authorised insurance broker. This is to prevent potential conflicts of interest and ensure clear lines of responsibility in the insurance market. Therefore, if an individual is an appointed insurance agent, they cannot also be an authorised insurance broker, regardless of whether they are dealing with the same or different clients.

The question tests the understanding of the minimum paid-up capital requirements for authorized insurers in Hong Kong, specifically for a captive insurer. According to the provided text, a captive insurer has a minimum paid-up capital requirement of HK$2 million. The other options represent different scenarios or incorrect figures not applicable to a captive insurer.

Subrogation is a legal principle that allows an insurer, after paying a claim to an insured, to step into the shoes of the insured and pursue any rights the insured may have against a third party responsible for the loss. The insurer’s recovery under subrogation is limited to the amount it paid out in indemnity. In this scenario, the insurer paid HK$50,000 for the damage caused by the faulty wiring. Therefore, the insurer’s subrogation rights against the electrical contractor are limited to recovering the HK$50,000 it paid, not the full HK$70,000 value of the damage. The insured’s remaining interest in the loss (HK$20,000) is not recoverable by the insurer through subrogation.

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 is also mentioned under Customer Servicing, its primary focus is on the company’s overall standing and external image, which is not the core of the customer’s immediate needs in this scenario. Marketing and Promotion, and Insurance Sales are distinct functions focused on attracting new business and developing products, respectively, and are not directly involved in servicing existing policyholder requests for documentation or information.

Subrogation is a legal principle that allows an insurer, after paying a claim, to step into the shoes of the insured and pursue any rights the insured may have against a third party responsible for the loss. The insurer can only recover the amount it paid out as indemnity, not more. This principle is crucial for preventing unjust enrichment and ensuring that the party at fault bears the ultimate financial responsibility for the damage. In this scenario, the insurer has indemnified the policyholder for the damage caused by the faulty construction. Therefore, the insurer gains the right to sue the construction company for the amount it paid out, as the construction company is the third party responsible for the loss.

The question tests the understanding of the role of approved bodies of insurance brokers as defined by Hong Kong regulations. Section 70 of the Insurance Ordinance empowers the Insurance Authority to approve associations of insurance brokers. These approved bodies, such as the Hong Kong Confederation of Insurance Brokers and the Professional Insurance Brokers Association Limited, play a crucial role in self-regulation and upholding professional standards within the brokerage sector. Option B is incorrect because while brokers must be licensed, the question specifically asks about the function of approved bodies. Option C is incorrect as the Code of Conduct for Insurers applies to insurers, not brokers’ associations directly, although brokers are expected to adhere to ethical practices. Option D is incorrect because while client accounts are a requirement for brokers, it’s a regulatory requirement for individual brokers, not the primary function of an approved association.

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 inception of the policy. A property management company, acting as an agent for building owners, can secure insurance for the building. If the company is designated as the insured in the policy, it possesses an insurable interest derived from its authority and responsibility to manage the property on behalf of the principals. This interest is sufficient to validate the insurance, even if the company does not hold absolute ownership of the building. The question tests the understanding of how insurable interest can be established through agency and management responsibilities, not just direct ownership.

This question tests the understanding of the fundamental principles of risk management and insurance, specifically the distinction between different types of risks. A ‘pure risk’ is defined as a situation where there is only the possibility of loss or no loss, with no chance of financial gain. Conversely, a ‘speculative risk’ involves the possibility of gain as well as loss. ‘Particular risk’ refers to a risk that affects only an individual or a small group, while ‘fundamental risk’ affects a large segment of society or the economy. Therefore, a risk that presents only the potential for loss, without any possibility of a positive financial outcome, is classified as a pure risk.

The question tests the understanding of the role of approved bodies of insurance brokers as defined by Hong Kong regulations. Section 70 of the Insurance Ordinance empowers the Insurance Authority to approve associations of insurance brokers. These approved bodies, such as the Hong Kong Confederation of Insurance Brokers and the Professional Insurance Brokers Association Limited, play a crucial role in self-regulation and upholding professional standards within the brokerage sector. Option B is incorrect because while brokers must be licensed, the question specifically asks about approved *bodies* that represent them. Option C is incorrect as the Code of Conduct for Insurers applies to insurers, not broker associations. Option D is incorrect because while client accounts are a requirement for brokers, it’s a regulatory requirement for individual brokers, not the function of an approved association.

A contract is fundamentally a legally binding agreement. While many agreements exist in daily life, not all are intended to have legal consequences, such as a casual social arrangement. The core of a contract involves promises exchanged between parties, where each party expects these promises to be honored. The insurance policy itself is not the contract but rather the documented evidence of the contractual agreement between the insurer and the insured. The validity of a contract hinges on the presence of essential elements, and if any of these are missing, the agreement may be considered defective or non-existent in the eyes of the law.

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 this scenario, while both policies cover the same property and the same peril (fire), they are insuring different interests: the owner’s interest in the building and the tenant’s interest in the improvements. Since the interests covered are different, contribution between the insurers will not apply. Therefore, each insurer is liable for the full amount of the loss they cover, up to their respective policy limits.

This question tests the understanding of subrogation, specifically how it operates when an insurer has only partially indemnified a loss due to policy limitations. Subrogation allows an insurer to step into the shoes of the insured to recover from a third party responsible for the loss. However, the insurer’s recovery is generally limited to the amount they have paid out. If the insurer has only paid a portion of the total loss (e.g., due to a deductible or a policy limit), and the recovery from the third party exceeds the amount paid by the insurer, the insured is entitled to the remaining portion of the recovery to be made whole. This ensures the insured is not out-of-pocket for the uninsured portion of the loss, while also preventing the insurer from profiting from the subrogation beyond their indemnity payment. Therefore, the insured retains the right to any recovery exceeding the insurer’s payout.

The Insurance Agents Registration Board (IARB) has issued specific guidelines concerning the handling of premiums by insurance agents. These guidelines, referred to as the ‘Guidelines on Handling of Premiums’, provide recommendations on the appropriate methods for agents to manage client premiums. Adhering to these guidelines is crucial for maintaining compliance and ensuring the integrity of premium collection processes, as outlined in the Code of Practice for the Administration of Insurance Agents.

The question tests the understanding of how policy wording can modify the application of proximate cause. The phrase ‘directly or indirectly’ in an exclusion clause, as illustrated by the case of the army officer killed by a train during wartime, means that the insurer is not liable even if the excluded peril (war) was only a remote or indirect cause of the loss. This broadens the exclusion beyond what ‘proximate cause’ alone might imply. Therefore, a loss where the excluded peril is a contributing factor, however minor or indirect, would be denied coverage under such wording.