IIQE Paper 1 Principles and Practice of Insurance Examination Quiz 75

The scenario describes a situation where a customer is seeking clarification on policy terms and requesting a duplicate document. According to the 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 responsibility. Therefore, the primary department responsible for addressing both aspects of the customer’s request is Customer Servicing.

The scenario describes a Registered Person (RP) who has failed to submit proof of their Continuing Professional Development (CPD) hours when requested by the Insurance Authority (IA). According to the provided information, if an RP fails to respond to a request from the IA to produce proof of compliance with CPD requirements, their registration should be revoked for a period determined by the IA. Furthermore, their future applications for registration will not be processed unless they can provide the required proof of compliance. This directly addresses the consequence of non-compliance with CPD reporting obligations.

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 question tests the understanding of these specific obligations in such a cross-border compliance challenge.

The Anti-Money Laundering and Counter-Terrorist Financing Ordinance (AMLO) imposes specific obligations on Financial Institutions (FIs) to prevent money laundering and terrorist financing. Section 23 of Schedule 2 of the AMLO mandates that FIs must implement robust safeguards to ensure compliance with Parts 2 and 3 of Schedule 2 and to effectively mitigate money laundering and terrorist financing risks. Failure to do so, particularly if an FI knowingly contravenes a specified provision, can lead to criminal penalties, including imprisonment and fines. Disciplinary actions by Relevant Authorities (RAs) can also be imposed, which may include pecuniary penalties. Therefore, a financial institution must proactively establish and maintain comprehensive internal controls and procedures to meet these regulatory requirements and manage associated risks.

The scenario describes a financial institution (FI) employee who, while processing a transaction, becomes aware that the funds involved are likely proceeds from drug trafficking. The employee fails to report this suspicion to the Joint Financial Intelligence Unit (JFIU) as required by the Drug Trafficking (Recovery of Proceeds) Ordinance (DTROP). The DTROP explicitly states that failing to disclose knowledge or suspicion of property related to drug trafficking as soon as reasonably practicable is an offence. The maximum penalty for this specific offence is imprisonment for 3 months and a fine of $50,000. The question tests the understanding of the reporting obligations under the DTROP and the associated penalties for non-compliance.

The Insurance Authority (IA) mandates that travel insurance agents, their responsible officers (ROs), and technical representatives (TRs) must complete 3 Continuing Professional Development (CPD) hours annually, starting from August 1, 2008. This requirement is crucial for maintaining their registration status. Failure to meet this requirement can lead to revocation of registration. Specifically, a first-time failure to meet CPD hours typically results in a 3-month revocation, with a requirement to complete outstanding hours upon re-registration. Making a false declaration regarding CPD hours carries a more severe penalty of a 12-month revocation, also requiring completion of outstanding hours for re-registration. Non-response to requests for proof of compliance will also lead to revocation for a period determined by the Insurance Authority (IA), and future applications will not be processed without proof of compliance.

The scenario describes a situation where a registered person is assisting a potential policyholder with a proposal form. According to the regulations for the conduct of registered persons, specifically concerning the completion of proposal or application forms, the registered person must refrain from influencing the potential policyholder. It is crucial that the answers provided on the form are understood to be the policyholder’s own responsibility. Therefore, the registered person should clearly communicate this to the policyholder.

The principle of insurable interest, as outlined in insurance regulations, dictates that a policyholder must have a legitimate financial stake in the subject of the insurance. This means that the policyholder would suffer a direct financial loss if the insured event (e.g., damage to property, death of a person) occurs. While a creditor has a financial relationship with a debtor, this relationship alone does not grant the right to insure the debtor’s general property unless there is a specific legal claim, such as a mortgage over that property. Therefore, a creditor cannot insure a debtor’s property simply because they are owed money.

The principle of insurable interest is fundamental to the validity of an insurance contract. It requires the policyholder to have a legally recognized financial stake in the subject matter of the insurance. This means that the policyholder must stand to 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, or property they own. A mere expectation of profit or a relationship that does not involve a potential financial loss if the insured event occurs is generally not sufficient. In this scenario, while the business partner has a financial interest in the success of the venture, they do not have a direct insurable interest in the life of the other partner unless specific legal provisions or contractual arrangements (like a key person insurance policy) are in place, which are not mentioned. Therefore, the absence of a direct, legally recognized financial loss upon the death of the other partner means there is no insurable interest in their life.

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 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. The question describes a scenario where an insurance intermediary collects funds that are later identified as being linked to terrorist activities. By reporting this suspicion to the JFIU, the intermediary can avail themselves of a statutory defence against potential offences under the UNATMO related to the disclosed property. Failing to report or reporting to an incorrect authority would not provide this specific defence.

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 are geared towards increasing business, the core issue presented is a client’s negative experience with a service request. Therefore, addressing this complaint effectively and efficiently is a primary responsibility of the customer servicing department, as outlined in the syllabus regarding handling client inquiries and documentation requests.

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 refer to non-contractual oversight and auditing mechanisms that a data user can implement to monitor a data processor’s adherence to data protection requirements. This provides flexibility for situations where a formal contract might not be feasible or sufficient on its own. Therefore, implementing a robust internal auditing framework to verify the processor’s practices falls under these ‘other means’ of ensuring compliance.

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 22(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 the regulatory oversight may extend to the group’s overall structure and governance. Therefore, understanding the definition of a ‘Group of Companies’ in this context is essential for compliance.

The question tests the understanding of the minimum paid-up capital requirements for authorized insurers in Hong Kong, as stipulated by the Insurance Companies Ordinance. Specifically, it focuses on the scenario where an insurer carries on both General and Long Term business. According to the provided text, the minimum paid-up capital requirement for an insurer carrying on both General and Long Term business is HK$20 million. The other options represent different capital requirements for different types of insurers or business lines: HK$10 million is the minimum for General Business if not carrying on statutory insurance business, HK$2 million is the minimum for Long Term Business or Captive Insurers, and HK$5 million is not a specified minimum capital requirement in the provided context.

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. The presence of an automatic sprinkler system in a commercial property is a fact that reduces the likelihood of a fire loss, thus diminishing the risk. Therefore, its non-disclosure, in the absence of a direct question, does not constitute a breach of utmost good faith.

This question tests the understanding of the concept of ‘Agency by Estoppel’ within contract law as it applies to insurance. Agency by Estoppel arises when a principal, through their words or actions, leads a third party to believe that another person is their agent. If the third party acts on this belief, the principal is then prevented (estopped) from denying the existence of the agency relationship, even if no actual agency was granted. This is distinct from apparent authority, where the principal grants the agent more authority than they actually possess, but the agency itself exists. In the scenario, Mr. Chan’s consistent allowance of Ms. Lee to present herself as his representative, coupled with his inaction when she uses his company letterhead, creates a representation to potential clients that she is indeed his agent. Therefore, if a client enters into an agreement with Ms. Lee based on this representation, Mr. Chan would be bound by her actions under the principle of Agency by Estoppel.

The Insurance Authority (IA) mandates that travel insurance agents, their responsible officers (ROs), and technical representatives (TRs) must complete 3 Continuing Professional Development (CPD) hours annually, starting from August 1, 2008. This requirement is crucial for maintaining their registration status. Failure to meet this requirement can lead to revocation of registration. Specifically, a first-time failure to meet CPD hours typically results in a 3-month revocation, with a requirement to complete outstanding hours upon re-registration. Making a false declaration regarding CPD hours carries a more severe penalty of a 12-month revocation, also requiring completion of outstanding hours. Non-response to requests for proof of compliance can lead to revocation for a period determined by the Insurance Authority (IA), and future registration applications will not be processed without proof of compliance.

The Code of Practice for the Administration of Insurance Agents, issued by the HKFI with the approval of the Insurance Authority, defines various terms crucial for understanding the regulatory framework. An ‘Insurance Agent’ is broadly defined as a person who advises on or arranges insurance contracts 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 acting solely as Responsible Officers or Technical Representatives, as these roles are defined in relation to the primary agent (Individual Agent or Insurance Agency). Therefore, a Responsible Officer or a Technical Representative, by their specific exclusion from the primary definition of ‘Insurance Agent’ within the Code, are not considered ‘Insurance Agents’ themselves under this specific definition, although they are registered persons who perform critical functions for an insurance agency.

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. 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 to maintain Professional Indemnity Insurance. An insurance agent, on the other hand, primarily represents the insurer and generally has a lower expected level of expertise towards the policyholder, thus not being statutorily required to carry this specific insurance.

A voidable contract is one that appears legally binding but can be nullified by one of the parties if they choose to do so, typically due to a defect present at the time of formation. This right to void the contract must be exercised within a reasonable timeframe after the aggrieved party becomes aware of their option. In the context of insurance, this situation can arise if the proposer omits or misrepresents crucial information during the application process. The contract remains valid until the insurer (or sometimes the insured, depending on the circumstances) takes action to void it. An unenforceable contract, conversely, is one that is valid in principle but cannot be upheld in court due to a procedural or legal technicality, such as a missing stamp duty on a lease. This defect can often be rectified, making the contract enforceable. A void contract is invalid from its inception and has no legal effect whatsoever. A contract lacking essential elements like offer, acceptance, consideration, capacity, legality, or intention to create legal relations is typically void, not voidable or unenforceable.

The question tests the understanding of policy provisions that can lead to a payout exceeding the actual loss incurred (i.e., more than indemnity). ‘New for Old’ cover means that if an item is damaged or destroyed, it is replaced with a new item, regardless of the age or depreciation of the original. This often results in a payout greater than the depreciated value of the lost item, thus exceeding pure indemnity. Agreed value policies fix the value of the insured item at the commencement of the policy. If the item is lost or destroyed, the insurer pays the agreed value, which may be higher than the market value at the time of the loss, again exceeding strict indemnity. Reinstatement insurance allows the insured to repair or replace the lost or damaged property to a condition substantially the same as it was before the loss, without deduction for depreciation. This can also lead to a payout exceeding the depreciated value. The condition of average, conversely, is a clause designed to prevent underinsurance by ensuring that the payout is proportionate to the sum insured relative to the actual value of the property. If the property is underinsured, the claim payout is reduced proportionally, thus enforcing indemnity rather than exceeding it. Therefore, ‘New for Old’ cover, Agreed value policies, and Reinstatement insurances are the provisions that can result in more than indemnity being payable.

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 common knowledge and facts already known to the insurer are exceptions, a fact that reduces the risk, such as the presence of a sprinkler system, is still considered relevant to the insurer’s assessment of the risk and premium calculation, even if it lowers the risk. Therefore, its non-disclosure, even if it would have led to a lower premium, is a breach of utmost good faith.

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.

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 regulatory requirements, including those related to financial soundness and operational capabilities. While a broker must disclose their registration number upon request and on business cards, and provide a Customer Protection Declaration for new long-term policies, these are distinct obligations from the annual financial reporting and auditor’s confirmation of compliance with minimum requirements.

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 oversight by the IA regarding both the quantity and the collectability of the reinsurance. The IA has specific guidelines, particularly for reinsurance with related companies, to ensure that the insurer’s prudent control over these arrangements is not compromised, thereby safeguarding the interests of the insuring public. While corporate governance and asset maintenance are important, the core regulatory requirement directly addressing the financial stability through risk transfer is reinsurance.

The question tests the understanding of how salvage value affects the indemnity provided by an insurance policy. When damaged property has a residual value, this value is factored into the calculation of the loss. The insurer can either deduct the salvage value from the payout, allowing the insured to retain the damaged item, or the insurer can take possession of the salvage and pay the full claim amount. Both methods aim to prevent the insured from profiting from the loss and ensure the indemnity does not exceed the actual loss suffered. Option B is incorrect because the insurer typically takes possession of salvage if they pay the full claim, not the insured. Option C is incorrect as salvage is a deduction or a transfer of ownership, not an additional payment. Option D is incorrect because while salvage reduces the net loss, it doesn’t inherently mean the policy is voided; rather, it’s part of the claims settlement process.

This question tests the understanding of how salvage value impacts the indemnity provided by an insurance policy. When damaged property has residual value (salvage), this value is factored into the calculation of the loss. The insurer can either deduct the salvage value from the payout, allowing the insured to retain the damaged item, or the insurer can take possession of the salvage and dispose of it, paying the full loss amount. Both methods aim to prevent the insured from profiting from the loss and ensure the indemnity does not exceed the actual loss suffered.

This question tests the understanding of how salvage value impacts the indemnity provided by an insurer. When damaged property has residual value, this value is factored into the calculation of the loss. The insurer can either deduct the salvage value from the payout, allowing the insured to retain the damaged item, or the insurer can take possession of the salvage and sell it, effectively recovering some of their payout. In this scenario, the insurer chose the latter, meaning they paid the full agreed-upon loss amount and then took ownership of the damaged vehicle to recoup some of their expenses through its sale. This is a standard practice to ensure the principle of indemnity is upheld, preventing the insured from profiting from a loss.

The Insurance Ordinance explicitly prohibits an individual from simultaneously holding the roles of an appointed insurance agent and an authorised insurance broker. This restriction applies regardless of whether the clients are the same or different. The rationale behind this rule is to prevent potential conflicts of interest and to maintain clear lines of responsibility and accountability within the insurance intermediary sector. An appointed insurance agent acts on behalf of the insurer, while an authorised insurance broker acts as an independent intermediary representing the client’s interests. Allowing an individual to perform both roles could compromise their ability to act impartially and in the best interest of the client.