IIQE Paper 1 Principles and Practice of Insurance Examination Quiz 74

The principle of utmost good faith in insurance mandates that all material facts 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 inquiry is made. An automatic sprinkler system, by reducing the likelihood of fire damage, inherently diminishes the risk. Therefore, its non-disclosure, in the absence of a specific question about protective measures, does not constitute a breach 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 question tests the understanding of how salvage value impacts the indemnity provided by an insurer. When damaged property has residual value (salvage), the insurer’s liability is reduced by this value. The insured can either receive the loss amount minus the salvage value and keep the salvage, or the insurer can take possession of the salvage and pay the full loss. In this scenario, the damaged vehicle has a salvage value of $5,000. The total repair cost is $20,000. The insurer’s liability is the repair cost minus the salvage value, which is $20,000 – $5,000 = $15,000. This aligns with the principle of indemnity, ensuring the insured is not overcompensated.

The 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 agent is genuinely appointed but appears to have broader powers than actually conferred. In the scenario, Mr. Chan’s consistent allowance of Ms. Lee to present herself as his representative, coupled with his failure to correct this misrepresentation, creates the conditions for agency by estoppel. Therefore, he would be bound by her actions towards a third party who reasonably relied on this representation.

This question tests the understanding of ‘Non-fraudulent Non-Disclosure’ which is a breach of utmost good faith. This occurs when a party, without intent to deceive, fails to reveal material facts to another party. In the context of insurance, the insured has a duty to disclose all material facts to the insurer. Failing to do so, even if unintentional or due to negligence, can invalidate the policy. Option B describes ‘Ordinary Good Faith’, which only requires truthful answers to specific questions, not proactive disclosure of all material facts. Option C describes a ‘Performance Bond’, which is a guarantee of contract fulfillment. Option D describes ‘Particular Risk’, which refers to the scope of a risk’s impact.

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 required fitness and properness standards, 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.

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 insurers are regulated, the question specifically asks about approved bodies of brokers. Option C is incorrect as the Insurance Authority is the regulator, not an approved body of brokers itself. Option D is incorrect because while client accounts are important for brokers, it’s a requirement for their operation, not the definition of an approved body.

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 there isn’t a dedicated investment department. This responsibility is paramount for ensuring the security of assets, achieving competitive returns, and maintaining sufficient liquidity to meet financial obligations. The other options, while important accounting tasks, do not directly address the strategic management of the insurer’s financial resources in the same way as investment oversight.

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 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.

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 if circumstances change. 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 monitor. 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 permanence, not the existence of guidelines themselves.

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 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 distinct obligations from the annual financial reporting and auditor’s confirmation of compliance with minimum requirements.

The question tests the understanding of an insurance agent’s obligations regarding their registration and disclosure. According to the provided text, an insurance agent must disclose their registration number upon request and identify it on their business cards if distributed. Furthermore, if they engage in Restricted Scope Travel Business and provide face-to-face service at a service desk or counter, they must display their name and registration number on a name plate at that location. Option A correctly captures these requirements. Option B is incorrect because while registration is crucial, the specific requirement to display it on a name plate is conditional on the type of business and service delivery method, not a universal mandate for all business cards. Option C is incorrect as the obligation to register with the MPFA is specific to agents also dealing with MPF schemes, not a general requirement for all agents. Option D is incorrect because while an agency agreement is required, the specific clause about complying with Part F of the Code is a detail of that agreement, not the primary disclosure obligation tested here.

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 core principle here is that Financial Institutions (FIs) must establish robust internal controls to prevent employees from inadvertently or intentionally revealing information that could alert a customer or another party that their activities are under scrutiny for potential money laundering or terrorist financing (ML/TF). This includes training staff to conduct customer inquiries in a manner that does not suggest suspicion. The Guideline emphasizes proactive identification of unusual activities by understanding customer behavior and recognizing deviations. Therefore, an FI’s responsibility extends to ensuring its appointed agents are adequately trained and equipped to identify and report suspicious activities, and that their processes do not lead to tipping off.

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, meaning it cannot profit from the recovery. While subrogation can arise from various legal bases, including tort, contract, and statute, its core purpose is to transfer the insured’s recovery rights to the insurer.

The Insurance Ordinance, specifically Section 70, empowers the Insurance Authority to approve bodies that represent insurance brokers. Currently, the Hong Kong Confederation of Insurance Brokers and the Professional Insurance Brokers Association Limited are the recognized approved bodies. Therefore, any entity seeking to be recognized as an approved body must receive formal approval from the Insurance Authority under this provision.

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. Inward 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.

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 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 core principle here is that Financial Institutions (FIs) must establish robust internal controls to prevent employees from inadvertently or intentionally revealing information that could alert a customer or another party that their activities are under scrutiny for potential money laundering or terrorist financing (ML/TF). This includes training staff to conduct customer inquiries in a manner that avoids any suggestion of tipping off. The Guideline emphasizes that knowing customer behavior and identifying deviations is key to recognizing suspicious activities. Therefore, ensuring staff are adequately trained on recognizing ML/TF indicators and understanding the risks of tipping off is paramount.

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 facilitates a transaction involving funds suspected to be linked to terrorism. By reporting this suspicion to the JFIU, the intermediary is availing themselves of the statutory defence against potential offences under the UNATMO related to the disclosed activity. Failing to report or reporting to an incorrect authority would not provide this defence.

The Insurance Agents Registration Board (IARB) plays a crucial role in the regulation of insurance intermediaries in Hong Kong. According to the provided text, the IARB has the authority to investigate matters related to registration applications, renewals, and complaints against registered persons. It can also refer these matters for investigation and receive reports. Furthermore, the IARB can direct principals or registered persons to take disciplinary action and has the power to register or revoke the registration of insurance agents, responsible officers, and technical representatives. Finally, it is mandated to report breaches of the Insurance Ordinance or the Code to the Insurance Authority (IA) if a registered person is found to be unfit or has contravened regulations. Therefore, all these functions fall within the purview of the IARB’s responsibilities.

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. The guideline on reinsurance with related companies specifically addresses situations where an insurer reinsures with an entity within the same corporate group. The IA’s concern in such cases stems from the potential for compromised prudent control over reinsurance arrangements, which could jeopardize the interests of policyholders. Therefore, the IA’s focus is on ensuring that these arrangements, even with related parties, are robust and provide genuine financial security, thereby safeguarding the insuring public.

This question tests the understanding of how proximate cause operates in insurance claims, particularly when multiple perils are involved. The scenario describes a chain of events starting with negligence (an uninsured peril), leading to a collision, then fire, then explosion, and finally water damage. The key principle here is that if an uninsured peril (negligence) leads to an insured peril (fire, in the context of a fire policy), and that insured peril then leads to the loss, the loss is generally recoverable. The illustration provided in the syllabus highlights that even if the ultimate cause is an uninsured peril, if it triggers a chain of events where an insured peril is the proximate cause of the loss, the policy can respond. In this case, the fire is the insured peril that directly leads to the explosion and subsequent water damage. Therefore, the loss is recoverable under the fire policy, as the fire is considered the proximate cause in this chain.

This question tests the understanding of an agent’s duty of care and skill. An agent is expected to exercise reasonable care and skill in performing their duties. While the law doesn’t demand perfection, a failure to meet this standard can lead to the principal reclaiming losses from the agent. In this scenario, the agent’s failure to renew the policy due to oversight, despite having the funds, demonstrates a lack of reasonable care and skill, making the principal liable for the loss caused by the lapse in coverage and allowing the principal to seek recourse from the agent.

The Conduct of Insurance Agents for General Insurance Business and Restricted Scope Travel Business mandates specific professional behaviours. Agents are required to identify themselves before engaging in business discussions to ensure transparency and build trust. They must also provide advice only when they possess the necessary knowledge and expertise, preventing misrepresentation or unsuitable recommendations. Furthermore, a crucial aspect of their duty is to clearly explain policy coverage and ensure the client comprehends the terms and benefits of the insurance product they are purchasing. This includes highlighting differences when comparing policies to enable informed decision-making. Therefore, all four listed points are essential components of an agent’s conduct.

The Insurance Authority (IA) has the ultimate oversight of the insurance industry in Hong Kong. While the Insurance Agents Registration Board (IARB) plays a crucial role in administering the Code of Conduct for Persons Licensed by the IA, including registering insurance agents, responsible officers, and technical representatives, its actions are subject to the overarching authority of the IA. The IARB can report breaches or unsuitability of registered persons to the IA, indicating that the IA is the final regulatory body. The Hong Kong Federation of Insurers (HKFI) provides general or specific directions to the IARB, but this does not elevate the HKFI to the primary regulatory authority over the IA’s functions. The Insurance Ordinance is the primary legislation, but the question asks about the body that the IARB reports to regarding breaches, which is the IA.

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 syllabus, a captive insurer has a minimum paid-up capital requirement of HK$2 million. The other options represent different capital requirements for other types of insurers or business lines, or are incorrect figures.

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 IARB will consider a person not fit and proper if they have been found to have contravened the Code of Conduct or the rules of the Hong Kong Federation of Insurers (HKFI). This includes any instances of non-compliance or breaches. Therefore, a history of such violations directly impacts an individual’s eligibility for registration.

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 thoroughly understanding the client’s situation and recommending a product that genuinely fits, rather than pushing a sale. Misrepresenting policy features or benefits, especially to encourage the replacement of existing policies to the client’s detriment, is a serious breach of conduct. Offering unauthorized incentives or rebates also violates ethical and regulatory standards. Therefore, the most critical responsibility among the choices is ensuring the suitability of the proposed policy.

An insurance broker has a fundamental duty to prioritize their client’s interests above all other considerations. This principle is paramount when providing advice or arranging insurance. 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 upholding the client’s best interests.