IIQE Paper 1 Principles and Practice of Insurance Examination Quiz 77

The ‘single article limit’ in a household contents policy is a clause designed to manage the insurer’s risk when a single, highly valuable item constitutes a disproportionately large portion of the total sum insured. If an insured item’s value is not specifically declared and insured separately, the policy will cap the payout for that item to a predetermined amount, regardless of its actual market value or the overall sum insured for contents. This prevents a situation where a single item’s loss could effectively exhaust the entire policy limit, leaving other insured items undercovered. The question tests the understanding of this specific risk management tool within general insurance policies.

The scenario highlights a situation where a customer is dissatisfied with a policy amendment process, which falls under the purview of customer servicing. While marketing and public relations are important for a company’s image, and sales enhancement programs aim to boost business, the core issue presented is a client’s negative experience with a service request. Therefore, addressing this directly relates to the customer servicing function, specifically handling client interactions and ensuring satisfaction with administrative processes like policy amendments.

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 can be renewed not earlier than three months before its current expiry. This ensures that the renewal process is initiated within a timely window, allowing for necessary checks and compliance, such as fulfilling ‘fit and proper’ criteria and Continuing Professional Development (CPD) requirements, to be completed before the existing registration lapses.

The scenario describes an insurance agent who is also licensed as a travel agent and wishes to engage in restricted scope travel insurance business. According to the provided text, an insurance agent engaging in restricted scope travel business must be licensed as a travel agent under the Travel Agents Ordinance. This requirement is explicitly stated in section 6.2.2(f)(x) of the Code. Therefore, the agent must hold this additional license to legally conduct this specific type of business.

This question tests the understanding of how subrogation proceeds are shared when the recovery from a negligent third party exceeds the total loss suffered by the insured. In the ‘Excess’ method of subrogation sharing, the insurer is typically reimbursed first for the amount they paid out. If the recovery is greater than the insurer’s payout, the excess amount is then shared with the insured. In this scenario, the insured’s loss was $10,000, and the insurer paid $40,000. The recovery from the third party is $45,000. The insurer is entitled to the first $40,000 of the recovery. The remaining $5,000 ($45,000 – $40,000) is then returned to the insured, as it represents the portion of their loss that was not covered by the insurer and was recovered from the third party. Therefore, the insured receives $5,000, and the insurer receives $40,000.

This question tests the understanding of the fundamental principles of risk management and insurance, specifically the concept of ‘insurable risk’. An insurable risk must possess certain characteristics to be accepted by an insurer. These typically include being definite and measurable, accidental, not catastrophic, and having a large exposure base. The scenario describes a situation where a company is considering insuring its entire inventory against a single, massive earthquake that could destroy everything. While the loss would be definite and accidental, it would likely be catastrophic (affecting a large number of insureds simultaneously) and potentially unmeasurable in its exact financial impact due to the scale of destruction. Therefore, it would not be considered a standard insurable risk. Option (b) describes a risk that is too speculative, as it involves the possibility of both gain and loss, which is generally not insurable. Option (c) describes a risk that is too certain or predictable, such as routine operational costs, which are managed through budgeting rather than insurance. Option (d) describes a risk that is too small or insignificant to warrant insurance coverage due to administrative costs.

The scenario describes a situation where a customer is seeking clarification on their existing policy, specifically requesting a duplicate policy document and an amendment to their coverage details. According to the provided syllabus, the Customer Servicing department is responsible for handling such requests, including the provision of duplicate policies and amendments to existing policies. While Marketing and Promotion might be involved in the broader image and external communications, and Sales focuses on product development and sales enhancement, the direct handling of policy documentation requests falls under the purview of Customer Servicing.

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 duty to report.

This question tests the understanding of an insurance intermediary’s role in preventing corruption and fraud, specifically referencing the collaborative efforts between the ICAC and the Insurance Authority. The ‘Practical Guide on Professional Ethics for Life Insurance Intermediaries’ is a key resource developed for this purpose. Option A correctly identifies this guide as a primary tool for enhancing ethical conduct and vigilance against corruption within the life insurance sector, aligning with the ICAC’s initiatives to support the industry.

The Insurance Agents Registration Board (IARB) is the body responsible for registering insurance agents and handling complaints against them, as outlined in the Code of Practice for the Administration of Insurance Agents. While the Insurance Claims Complaints Bureau and Panel deal with claims-related disputes, and the Insurance Ordinance provides the overarching regulatory framework for the industry, the IARB specifically focuses on the conduct and registration of agents.

The question tests the understanding of the minimum net asset requirements for different types of insurance brokers. 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. Therefore, the statement that an incorporated insurance broker must maintain a minimum net asset value of HK$100,000 and a minimum paid-up share capital of HK$100,000 is accurate according to the regulations.

The Insurance Ordinance (Cap. 41) mandates that any entity wishing to conduct insurance business in or from Hong Kong must first obtain authorization from the Insurance Authority (IA). This authorization process involves meeting specific minimum requirements set by the Ordinance, which include aspects like paid-up capital, solvency margin, the suitability of directors and controllers, and adequate reinsurance arrangements. The IA also issues Guidelines to further assess an applicant’s financial soundness and ongoing suitability. Therefore, operating an insurance business without this prior authorization from the IA is a violation of the regulatory framework.

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.

This question tests the understanding of ‘Non-fraudulent Non-Disclosure’ as a breach of utmost good faith. It occurs when a party, without intent to deceive, fails to reveal material facts. The scenario describes an applicant for travel insurance who, due to an oversight rather than deliberate concealment, fails to mention a pre-existing medical condition that is highly relevant to the insurer’s risk assessment. This omission, even if unintentional, constitutes a breach of the duty of utmost good faith, as it involves the failure to disclose a material fact. Option B is incorrect because ‘Ordinary Good Faith’ only requires truthful answers to specific questions, not proactive disclosure of all known facts. Option C is incorrect as ‘Offer’ and ‘Offeree’ are contract formation terms. Option D is incorrect because ‘Peril’ refers to the cause of loss, not the failure to disclose information.

The Insurance Authority (IA) is responsible for overseeing the conduct of insurance intermediaries. When an applicant for registration as a Registered Person is undergoing the approval process, the appointing Principal or Insurance Agent has a duty to inform the IA of any changes in the applicant’s circumstances that might influence the IA’s decision. This proactive disclosure is crucial for maintaining the integrity of the registration process and ensuring that only fit and proper individuals are registered. Failure to provide such information could lead to the application being rejected or, if registered, potential disciplinary action.

A registered person selling long-term insurance must make reasonable efforts to ensure the policy aligns with the client’s disclosed needs and financial capacity. This includes understanding the client’s situation and recommending a suitable product, rather than pushing any available policy. The other options describe actions that are either not explicitly required or are potentially misleading. Offering a rebate not specified in the policy is prohibited, and while explaining differences is important, it’s secondary to suitability. Focusing solely on favorable aspects of an illustration is also a prohibited practice.

The principle of insurable interest is fundamental to the validity of an insurance contract. It requires that the policyholder must have a legally recognized financial stake in the subject matter of the insurance. This means that the policyholder would suffer a direct financial loss if the insured event occurs. For instance, a person has an insurable interest in their own life, their spouse’s life (often presumed by law), and their property. A creditor generally has an insurable interest in the life of their debtor, but not necessarily in the debtor’s property unless it’s specifically pledged as collateral. The scenario describes a situation where a business owner is insuring a valuable piece of equipment that they use for their operations. If this equipment is damaged or destroyed, the business owner will suffer a direct financial loss because their ability to generate revenue will be impaired. Therefore, they possess a legally recognized financial relationship to the equipment, satisfying the requirement for insurable interest.

The United Nations (Anti-Terrorism Measures) Ordinance (UNATMO) empowers the Secretary for Security to freeze assets suspected of being linked to terrorism. Section 4 of the UNATMO specifically prohibits providing property or financial services to or for the benefit of a terrorist or terrorist associate without a license. The question describes a scenario where a financial institution (FI) is asked to facilitate a transaction for an individual whose name appears on a list of individuals associated with a designated terrorist organization. This directly triggers the FI’s obligation under the UNATMO to cease dealing with such property and to report the suspicion. Failing to do so would be a contravention of the ordinance. While reporting to the Joint Financial Intelligence Unit (JFIU) is a crucial step, the immediate and primary legal obligation upon suspecting a connection to terrorism, as per the UNATMO, is to cease dealing with the property and to seek clarification or a license if applicable, or to report the suspicion. The scenario implies a direct link to a designated entity, making the prohibition on dealing with the property paramount. The other options are either incorrect interpretations of the law or describe actions that are secondary to the immediate prohibition.

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 the specific intervention power described in this context. Restrictions on investments, custody of assets by a trustee, and special actuarial investigations are distinct regulatory tools.

An insurance broker has a fundamental duty to prioritize their client’s interests above all other considerations. This principle is paramount in all dealings, including advice and arranging insurance contracts. Limiting a client’s choices of insurers without a valid reason would be a breach of this duty, as it restricts the client’s ability to secure the most suitable coverage. Similarly, being overly reliant on a single insurer can lead to a lack of objective advice and potentially disadvantage the client. Therefore, maintaining independence and offering a broad range of options are crucial for fulfilling this fiduciary responsibility.

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 in advising their clients. Failure to do so, leading to a client’s loss, can constitute professional negligence. In such cases, the client has the right to seek compensation from the broker. To mitigate the financial risks associated with such claims, insurance brokers are mandated by regulations to maintain Professional Indemnity Insurance. This insurance specifically covers liabilities arising from errors or omissions in the professional services provided.

The United Nations (Anti-Terrorism Measures) Ordinance (UNATMO) criminalizes the provision or collection of property, or making property or financial services available to terrorists or their associates. A statutory defence is provided if a report is filed with the Joint Financial Intelligence Unit (JFIU) in the prescribed manner concerning the acts disclosed. Therefore, reporting suspicious activities to the JFIU is a crucial step to avoid liability under the UNATMO for actions disclosed in the report.

Guidance Note 6 (GN6) clarifies that an insurance agent, responsible officer, or technical representative cannot act or present themselves as engaged in the insurance agency business for a principal before receiving written confirmation of their registration from the Insurance Authority Accreditation and Registration Board (IARB). Acting as such before this confirmation can be an offense under Section 77 of the Insurance Ordinance, potentially leading to criminal prosecution. Therefore, the effective date of registration is the date specified by the IARB in the Notice of Confirmation of Registration, and any activity before this date is prohibited.

The core of underwriting in general insurance involves a continuous assessment of risks. Unlike life insurance, where underwriting is largely a one-time event at policy inception due to its non-cancellable nature, general insurance policies are subject to renewal. This renewal process provides insurers with the opportunity to re-evaluate the risk profile of the insured and adjust terms, premiums, or even decline renewal if the risk has become unacceptable. Therefore, the ongoing monitoring and adjustment of terms based on performance and risk changes are integral to the underwriting process in general insurance.

This question tests the understanding of product development within the insurance industry, specifically focusing on how insurers adapt to market dynamics. Product research is the systematic process of identifying and evaluating new insurance products or modifications to existing ones. This involves analyzing market trends, competitor offerings, customer needs, and regulatory changes to ensure the insurer’s product portfolio remains competitive and relevant. Developing new forms of cover or enhancing existing ones, as described in the scenario, is a direct outcome of effective product research. Options B, C, and D represent related but distinct activities. While underwriting is crucial for assessing risk and pricing, it’s a post-product development function. Claims management deals with processing and settling claims after a loss occurs. Actuarial analysis is a component of product development and pricing, but product research is the broader activity of market and product exploration.

The Personal Data (Privacy) Ordinance (PDPO) mandates that data users ensure the security of personal data entrusted to data processors. This includes obligating the processor to adhere to data protection principles. While contracts are a primary method, the PDPO also allows for ‘other means’ of compliance. These ‘other means’ are not explicitly defined but generally encompass non-contractual oversight and auditing mechanisms. Therefore, implementing robust internal policies and procedures for monitoring data processor activities, even without a formal contract, can be considered an ‘other means’ of ensuring compliance with data protection requirements.

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’s recovery under subrogation is limited to the amount it paid out as indemnity. In this scenario, the insurer paid HK$50,000 for the damage. Therefore, its subrogation rights against the negligent driver are capped at HK$50,000, even if the total cost of repairs or the driver’s liability exceeds this amount. The insured’s potential claim against the third party is for the full extent of their loss, but the insurer’s right to recover is restricted to its indemnity payment.

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.

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 indemnity (not a benefit), 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, while both policies cover the same property and the same peril (fire), they cover different interests: the merchant’s interest as owner and the warehouse operator’s interest as a bailee. Since the policies do not cover the same interest, the condition for contribution is not met, and therefore, contribution does not apply between the insurers.

This question assesses the understanding of the role of an accountant within an insurance company, specifically focusing on the critical function of managing company assets. While record-keeping, collections, and payments are all vital accounting functions, the prompt highlights the accountant’s responsibility for the care and placement of company assets, particularly when a dedicated investment department is absent. This responsibility is paramount for ensuring the security of funds, achieving competitive returns, and maintaining adequate liquidity to meet financial obligations, all of which are crucial for the insurer’s solvency and operational continuity. The other options represent important but distinct accounting functions that do not directly encompass the strategic management of company investments.