IIQE Paper 1 Principles and Practice of Insurance Examination Quiz 73

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 within the insurance industry. Therefore, if Mr. Chan is an appointed insurance agent for Insurer X, he cannot also be an authorised insurance broker, regardless of whether he is advising the same or different clients.

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. Option (b) is incorrect because while intermediaries should maintain good records, this is a general business practice and not the primary response to suspected fraudulent claims. Option (c) is incorrect as the intermediary’s role is not to directly investigate or prove fraud, but to report suspicions to the insurer. Option (d) is incorrect because while integrity is crucial, it’s a broader ethical principle, and the specific action required when suspecting fraud is reporting.

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 scenario highlights a situation where a Hong Kong-incorporated financial institution (FI) has an overseas branch 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) in Hong Kong about 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 options provided test the understanding of these two crucial steps. Option A correctly identifies both informing the RA and taking additional risk mitigation measures. Option B is incorrect because while informing the RA is necessary, it doesn’t address the risk mitigation aspect. Option C is incorrect as it suggests reporting to the Joint Financial Intelligence Unit (JFIU) which is not the primary action for this specific scenario of local legal prohibition, and it omits the risk mitigation step. Option D is incorrect because simply applying Hong Kong’s standards without considering local legal limitations is not feasible, and it also misses the reporting and risk mitigation requirements.

The Insurance Companies Ordinance (Cap. 41) mandates that insurance brokers maintain records that provide a clear and comprehensive account of their business activities. These records must be detailed enough to explain all transactions, accurately reflect the financial standing of the business, facilitate the preparation of financial statements that present a true and fair view, and be suitable for auditing. Specifically, the records must separately detail all transactions involving insurers, clients, and the broker themselves, all income and expenses, and all assets and liabilities. The requirement for records to be retained for a minimum of seven years is a key regulatory stipulation to ensure accountability and facilitate future investigations or audits.

The question tests the understanding of the definition of a ‘composite insurer’ as per Hong Kong insurance regulations. A composite insurer is defined as an insurer that transacts both long-term and general insurance business. Option A correctly identifies this dual business capability. Option B is incorrect because while insurers must be licensed, the term ‘composite’ specifically refers to the types of business transacted, not just the licensing status. Option C is incorrect as it focuses only on general business, excluding long-term business. Option D is incorrect because it describes an insurer that only handles long-term business, which is not a composite insurer.

When a Hong Kong-incorporated financial institution (FI) operates overseas and its foreign branches or subsidiaries cannot comply with Hong Kong’s Customer Due Diligence (CDD) and record-keeping requirements due to local legal prohibitions, the FI has specific obligations. According to the provided guidelines, the FI must first inform its relevant regulator (RA) about this inability to comply. Secondly, it must implement additional measures to effectively mitigate the Anti-Money Laundering and Counter-Terrorist Financing (AML/CFT) risks that arise from this non-compliance. These additional measures are crucial for maintaining the integrity of the AML/CFT framework despite local legal constraints.

Principle 6 of the Personal Data (Privacy) Ordinance grants data subjects the right to access and correct their personal data. This means an individual can request a copy of the information an insurance company holds about them, and if they find it inaccurate, they can ask for it to be corrected. This is a fundamental right ensuring transparency and accuracy in data handling.

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 principle of providing advice only within one’s expertise or seeking support when needed, as stipulated in the Conduct of Registered Persons.

The Insurance Authority (IA) has the power to impose requirements on registered persons and principals. If a principal or registered person, including the respondent’s appointed insurance agent, fails to adhere to a directive to take disciplinary or other action, the Insurance and Investment Schemes Arbitration Organisation (IARB) can report this non-compliance to the IA. Subsequently, the IA can enforce further disciplinary measures or other actions against the defaulting principal or registered person. This ensures accountability and adherence to regulatory standards within the insurance industry.

The Conduct of Insurance Agents for General Insurance Business and Restricted Scope Travel Business mandates specific professional behaviours. Agents are required to only offer advice within their areas of expertise, ensuring they possess the necessary knowledge and qualifications. It is fundamental for an agent to clearly identify themselves and their affiliation before engaging in any business discussions with a potential client. When comparing different insurance policies, agents must meticulously explain the distinctions in coverage, terms, and conditions to avoid misleading the client. Furthermore, a core responsibility is to clearly articulate the policy’s coverage and ensure the client comprehends what they are purchasing, thereby upholding the principle of utmost good faith and transparency. Therefore, all four listed points are essential components of the required conduct.

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, a data user can fulfill their obligation by implementing robust internal monitoring and auditing procedures for the data processor, even in the absence of a formal contract, provided these mechanisms effectively ensure compliance with data protection requirements.

The question tests the understanding of the definition of a ‘composite insurer’ under Hong Kong insurance regulations. A composite insurer is defined as an insurer that transacts both long-term business and general business. Option B is incorrect because it limits the scope to only one type of business. Option C is incorrect as it refers to a specific type of policy rather than the insurer’s overall business scope. Option D is incorrect because it describes a broker’s function, not an insurer’s business classification.

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 responsible party bears the cost. The insurer’s right to subrogation is limited to the amount they have paid out as indemnity. Therefore, if the insurer paid HK$50,000 for a loss caused by a third party, they can only recover up to HK$50,000 from that third party, even if the total loss was greater.

This question tests the understanding of non-fraudulent non-disclosure, which is a breach of the duty 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 unintentionally or due to negligence, can invalidate the policy. Option B describes a situation where the insured actively conceals information, which is fraudulent non-disclosure. Option C describes a situation where the insured only answers questions truthfully, which aligns with ordinary good faith but not the broader duty of disclosure. Option D describes a situation where the insurer fails to disclose information, which is not the insured’s responsibility in this context.

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 brokers, not individual licensing requirements. 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 practice, not the definition of an approved body.

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 are distinct functions. Complaints handling is another responsibility, but it’s not the primary focus of the customer’s request in this scenario. Therefore, the Customer Servicing department is the most appropriate area to address these needs.

A contract is fundamentally a legally enforceable agreement. While many agreements exist in daily life, such as social arrangements like a lunch appointment, they are not typically considered contracts because they are not intended to have legal consequences. If one party cancels a social engagement, the other party generally cannot pursue legal action. The core of a contract lies in promises or undertakings exchanged between parties, with the expectation of legal recourse if these promises are broken. An insurance policy itself is not the contract but rather the written evidence of an insurance contract, which is the underlying legally binding agreement.

The question tests the understanding of the minimum net asset requirements for different types of insurance brokers in Hong Kong, as stipulated by relevant regulations. 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. The question specifically asks about an incorporated insurance broker, making the HK$100,000 paid-up share capital a crucial component of the correct answer.

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. This scheme acts as a market of last resort, ensuring that such employers can obtain the necessary coverage. All insurers underwriting employees’ compensation business in Hong Kong are mandated by market agreement to be members of the ECIRS, thereby sharing the associated risks on a collective basis. This mechanism ensures the availability of this crucial insurance, fulfilling the legislative requirement for employers to provide it.

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 addresses the conduct and registration of agents.

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 one where there is only the possibility of loss or no loss, with no chance of gain. Speculative risk involves the possibility of both gain and loss. Fundamental risk affects a large segment of the population or economy, while particular risk affects only individuals or specific groups. The scenario describes a situation where a business might face a loss of its inventory due to a fire, which is a classic example of a pure risk as there is no potential for financial gain from the event itself, only the possibility of financial loss.

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 more than what the insurer paid, the excess amount goes to the insured until they are made whole for their uninsured portion of the loss. In this scenario, the insured’s loss was $10,000, and the insurer paid $40,000. The total loss is $50,000. The recovery is $45,000. The insurer is entitled to be repaid the $40,000 they paid. The remaining $5,000 ($45,000 – $40,000) then goes to the insured to cover their $10,000 uninsured portion of the loss. Therefore, the insured receives $5,000 and the insurer receives $40,000.

The ‘single article limit’ in a household contents policy is a clause designed to cap the insurer’s liability for any single item within the general contents sum insured. If an insured possesses an item of exceptionally high value that constitutes a significant portion of the total sum insured, and this item is not specifically declared and insured separately, the insurer will limit the payout for that item to a pre-defined amount. This prevents the insurer from being exposed to an unexpectedly large loss on a single, high-value item without having assessed and priced that specific risk. The scenario describes a situation where a valuable painting, not separately insured, is stolen. The policy has a single article limit of HK$50,000. Therefore, the maximum payout for the painting, regardless of its actual market value, is HK$50,000.

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 specifically listed as direct intervention powers in the context of managing rapid growth or potential difficulties arising from it. Restrictions on investments, custody of assets by a trustee, and special actuarial investigations are also intervention powers, but the limitation of premium income is the most direct response to concerns about the volume of new business and its associated liabilities.

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 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 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 non-cancellable by the insurer.

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.

The scenario describes a situation where a policy exclusion for losses ‘directly or indirectly’ caused by war is invoked. In insurance law, the phrase ‘directly or indirectly’ is interpreted broadly by courts. It means that if the excluded peril (in this case, war) is a contributing factor to the loss, regardless of how remote or indirect that contribution might be, the exclusion will apply. The death of the officer by a train, while not a direct act of war, occurred during wartime while he was on duty supervising a railway station. The court’s interpretation in such cases is that the war, even as an indirect cause, triggered the circumstances leading to the accident. Therefore, the insurer is not liable because the policy wording explicitly excludes losses arising ‘directly or indirectly’ from war.

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 and new business are separate powers, and the custody of assets by a trustee is a measure for additional security, not a direct intervention to limit growth.