IIQE Paper 1 Principles and Practice of Insurance Examination Quiz 76

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 regulatory framework. Failure to provide such information, or to notify the IA of changes, can lead to the application not being considered or, if already registered, disciplinary action. The IA’s decision to confirm an appointment is contingent upon its satisfaction with the applicant’s fitness and properness, which requires complete and accurate information.

This question tests the understanding of voidable contracts within the context of insurance. A voidable contract is valid until the aggrieved party chooses to void it. In insurance, this often arises from misrepresentation or non-disclosure at the proposal stage. Option (a) correctly identifies this characteristic. Option (b) describes an unenforceable contract, which is valid but cannot be enforced due to a procedural defect. Option (c) describes a void contract, which is invalid from the outset. Option (d) describes a contract that is valid and binding, which is the opposite of a voidable contract.

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 their personal data. This legislation applies broadly across both the public and private sectors, encompassing any entity that handles personal data in Hong Kong. Therefore, neither sector is exempt, and the ordinance’s provisions are binding on all organizations, regardless of whether they are government bodies or commercial enterprises.

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 conflicts of interest and ensure clear lines of responsibility. While an individual might be a director of both an insurance agent and an insurance broker, they cannot provide insurance advice to clients for either entity if they are acting in a capacity that requires such advice for the other. Therefore, if Mr. Chan is an employee of an insurance agent providing advice, he cannot simultaneously be an employee of an insurance broker.

The principle of utmost good faith in insurance mandates that all material facts must be disclosed by the proposer to the insurer. A material fact is defined as any circumstance that would influence a prudent insurer’s decision regarding accepting the risk or setting the premium. While a proposer must disclose facts that increase risk or affect premium calculation, they are not obligated to disclose facts that diminish the risk, assuming no specific inquiry is made about them. In this scenario, the automatic sprinkler system reduces the risk, and its non-disclosure, in the absence of a direct question, does not violate the duty of utmost good faith because it would have led to a lower premium, not a rejection of the risk or an increase in premium.

The Insurance Authority (IA) mandates that insurance brokers must submit annual audited financial statements and an auditor’s report within six months of their financial year-end. This auditor’s report specifically confirms adherence to minimum requirements, including those related to financial soundness, operational capabilities, and professional conduct. While the broker must also disclose their registration number upon request and on business cards, and provide a Customer Protection Declaration for new long-term policies, these are separate obligations from the annual financial reporting and auditor’s confirmation of meeting minimum standards.

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 core activity that involves monitoring existing products and developing new ones to remain competitive and relevant. Options B, C, and D describe related but distinct functions. ‘Portfolio development’ is a broader strategy that might incorporate product research, but it’s not the research itself. ‘Professional indemnity insurance’ is a specific type of product, not the process of developing it. ‘Reinsurance’ is a risk management technique for insurers, not a product development strategy.

The Personal Data (Privacy) Ordinance (PDPO) in Hong Kong mandates that when a data user intends to use personal data for direct marketing, they must provide specific prescribed information to the data subject. This information includes the types of personal data to be used, the categories of marketing subjects, and, if applicable, the classes of persons to whom the data will be provided for direct marketing. Crucially, if the data is provided to others for gain, the data user must also inform the data subject of this fact. The information must be presented in an easily readable and understandable format. The question tests the understanding of these notification requirements under the PDPO for direct marketing purposes.

The Insurance Ordinance mandates that authorized insurers maintain adequate reinsurance arrangements. This is a critical aspect of financial supervision, focusing on both the quantity and the collectability of the reinsurance. The Insurance Authority (IA) has specific guidelines, particularly for reinsurance with related companies, to mitigate potential conflicts of interest and protect policyholders. While corporate governance and asset maintenance are also important, the question specifically asks about a crucial element for financial security, which directly relates to reinsurance arrangements as stipulated by the Ordinance.

The Insurance Authority (IA) and the Insurance Agents Registration Board (IARB) assess whether an individual is ‘fit and proper’ to be registered as an insurance intermediary. A key aspect of this assessment involves reviewing past conduct. Specifically, the Code of Conduct for Persons Licensed by the IA (the Code) outlines grounds for deeming a person not fit and proper. Clause 6/31 (viii) explicitly states that a person being found not to have complied with or being in breach of the Code or the rules of the Hong Kong Federation of Insurers (HKFI) is a factor the IARB will consider. This directly addresses the scenario where an individual has previously failed to adhere to regulatory requirements.

This question tests the understanding of the responsibilities of an authorized insurer concerning its members’ financial reporting and auditor reviews, as stipulated by relevant regulations. Specifically, it focuses on the insurer’s duty to ensure that its members submit their financial statements and auditor’s reports as per membership rules. Furthermore, it highlights the insurer’s obligation to review these auditor reports for any adverse statements or qualifications that are not duly noted in the insurer’s own report. This ensures transparency and adherence to financial standards within the membership structure.

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 focus on broader company image and external communications, not direct customer requests for policy-related information or documents. Complaints handling is a separate function, though it may involve liaison with other departments. Therefore, the primary responsibility for addressing this customer’s needs falls under the Customer Servicing department’s remit for correspondence and documentation.

The scenario describes a situation where a registered person is advising a potential policyholder. According to the regulations, a registered person must ensure they are competent to provide advice or seek assistance from their Principal or appointing Insurance Agent when necessary. This directly aligns with the requirement to only offer advice within their expertise or to consult with their superiors if unsure, ensuring the client receives accurate and appropriate guidance. Option B is incorrect because while explaining policy coverage is important, it doesn’t address the competency aspect of giving advice. Option C is incorrect as disclosing registration numbers is a separate requirement and not directly linked to the act of giving advice. Option D is incorrect because while treating information confidentially is crucial, it doesn’t address the registered person’s obligation to be knowledgeable when providing advice.

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, the fundamental prerequisite for commencing insurance operations in Hong Kong is securing this official authorization from the IA.

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. Specifically, using data collected for one purpose (servicing existing policies with the former employer) for a new purpose (marketing for the new employer) without consent is a breach. The Personal Data (Privacy) Ordinance (PDPO) and its associated codes of practice emphasize that personal data should only be used for the purpose for which it was collected, or for a directly related purpose, unless consent is obtained for other uses. Taking copies of customer data from a former employer to solicit business for a new employer is a clear misuse of that data.

The HKFI’s ‘Guidelines on Complaint Handling’ emphasize that insurers must ensure their internal complaint handling procedures are accessible to customers. This includes publishing these procedures, making them available in all offices, providing them freely to customers upon request and automatically to complainants, and informing new customers about their availability. The core principle is that customers should be aware of how and where to lodge a complaint, and the process should be straightforward and transparent. Therefore, an insurer failing to inform new customers about the existence of these procedures would be in breach of these accessibility guidelines.

The core of underwriting in general insurance, unlike life insurance, is its dynamic nature. Because general insurance policies are typically subject to renewal and can be cancelled by the insurer, underwriting is not a singular, fixed event. Insurers can continuously monitor risks and adjust terms or decide on renewal based on performance and changing circumstances. This allows for a less centralized approach to underwriting compared to life insurance, where the commitment is long-term and changes require policyholder consent. The ability to review and adjust terms at renewal is a key differentiator.

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.

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.

Under the Personal Data (Privacy) Ordinance (PDPO), when a data user intends to use personal data for direct marketing for their own purposes, and they provide the prescribed information to the data subject either orally or in writing, the data subject’s consent or indication of no objection can be given in either format. However, if the data subject’s reply is given orally, the data user is legally obligated to confirm this consent in writing to the data subject within 14 days of receiving the oral reply. This written confirmation must specify the permitted kinds of personal data and the permitted classes of marketing subjects. This requirement ensures a clear and documented record of the data subject’s consent for direct marketing activities, mitigating potential disputes and ensuring compliance with the PDPO’s provisions on direct marketing.

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 to be payable. In the context of a landlord insuring against loss of rent due to a fire, the landlord has a direct financial interest in receiving rent. If a fire occurs and the property becomes uninhabitable, the landlord would suffer a direct financial loss from the cessation of rental income. Therefore, the landlord possesses insurable interest in the rental income stream, which is a legal right that can be insured.

The Insurance Complaints Committee (ICCB) Panel has the authority to review complaints against insurers. While the terms of the policy contract are generally binding, the Panel can override them if they lead to an outcome that is deemed unfair or unreasonable to the complainant. This power is derived from the ICCB’s Articles of Association, which stipulate that the Panel should consider general principles of good insurance practice and applicable laws. The Code of Conduct for Insurers, particularly Part III on Claims, emphasizes the need for insurers to handle claims efficiently, speedily, and fairly. Therefore, the Panel’s assessment of fairness in claim settlement is a key aspect of its function, allowing it to look beyond a strict interpretation of policy wording when equity demands it.

The question tests the understanding of the distinct responsibilities within an insurance company’s customer-facing departments, specifically focusing on the primary role of customer servicing. While marketing and sales departments also interact with clients, the core function of handling direct client inquiries, requests for policy documentation, and initial complaint management falls under customer servicing. Public relations, though related to client perception, is often a broader function, and while marketing handles external communications, customer servicing deals with the direct, day-to-day interactions and administrative needs of existing and potential clients. Therefore, managing requests for duplicate policies is a direct service to existing customers and a key responsibility of the customer servicing department.

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 operate in this specific capacity.

The HKFI’s ‘Guidelines on Complaint Handling’ emphasize that insurers must ensure their internal complaint handling procedures are accessible to customers. This includes publishing these procedures, making them available in all offices, providing them freely to customers upon request and automatically to complainants, and informing new customers about their availability. The core principle is that customers should be aware of how and where to lodge a complaint.

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 indicates that in General Business, the top ten insurers held a 42% market share, and no single insurer exceeded 17% in any major class. This suggests a more fragmented market. In contrast, for Long Term Business, the top ten insurers held 75% of the market, the top five held 55%, and the top one held 16%. This significant concentration, particularly the higher market share held by the top players and the combined share of the top five, points to a less evenly distributed market compared to General Business. Therefore, General Business is more evenly distributed among authorized insurers.

The Employees’ Compensation Insurance Residual Scheme Bureau (ECIRS Bureau) was established to address situations where employers, particularly those with employees in high-risk occupations, faced difficulties in securing mandatory employees’ compensation insurance. It functions as a market of last resort, ensuring that such employers can obtain the necessary coverage. This is achieved through a market agreement where all insurers underwriting employees’ compensation business in Hong Kong are required to be members of the ECIRS and collectively share the associated risks. The Bureau oversees the operation of this scheme, fulfilling its purpose of providing a safety net for employers unable to obtain this essential insurance through the standard market.

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. Options (i) and (ii) both fall directly within the purview of financial management and are typical duties of an Accounts department. Conversely, determining the insurability of a risk (iii) is the responsibility of the Underwriting department, which assesses the likelihood and potential cost of a loss. Arranging the launch of a new policy product (iv) is typically handled by the Product Development or Marketing departments, involving market research, policy design, and promotional strategies. Therefore, (iii) and (iv) are the functions least likely to be managed by the Accounts department.

This question tests the understanding of reinsurance from the perspective of an insurer ceding risk. Outward reinsurance is when an insurer transfers a portion of its own risks to another insurer or reinsurer. This is a fundamental risk management technique for insurers to manage their exposure and capacity. Inwards reinsurance, conversely, is when an insurer accepts risks from other insurers, acting as a reinsurer itself. The scenario describes an insurer seeking to reduce its potential payout on a large policy, which directly aligns with the definition of outward reinsurance.

The question tests the understanding of the ‘Fitness and Properness’ criteria for registered persons, as outlined in Part E of the Code of Practice for the Administration of Insurance Agents. Specifically, it focuses on the implications of a group of companies for an insurance intermediary. According to the provided text, for the purposes of clause 2.2(b) of the Code of Practice, a ‘Group of Companies’ refers to a relationship where companies are subsidiaries of a holding company or are subsidiaries of each other. This definition is crucial for determining if an intermediary operating within such a structure meets the fitness and properness requirements, as regulatory oversight often extends to the entire group. Therefore, understanding the definition of a group of companies in this context is essential for compliance.