IIQE Paper 1 Principles and Practice of Insurance Examination Quiz 72

The Insurance Authority (IA) mandates that individuals seeking to be registered as insurance intermediaries must demonstrate a commitment to ongoing professional development. This requirement is outlined in the Code of Conduct for Persons Licensed by the IA. Specifically, clause 6/32(d)(iii) states that all Registered Persons must comply with the Continuing Professional Development (CPD) Programme requirements as specified by the IA. Failure to adhere to these CPD requirements can lead to a person being considered not fit and proper, impacting their registration status. Therefore, a registered person’s continued eligibility hinges on their adherence to the IA’s CPD mandates.

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 up to the greater of $10 million or three times the profit gained or costs avoided due to the contravention. Therefore, establishing and maintaining comprehensive internal controls and safeguards is a fundamental requirement under the AMLO to avoid contraventions and associated penalties.

The Insurance Authority (IA) mandates specific criteria for individuals and entities seeking to operate as insurance brokers in Hong Kong. One fundamental requirement is that these individuals or entities must either be directly authorized by the IA or be a member of an approved body of insurance brokers. This ensures a regulated framework for the insurance broking industry. The question tests the understanding of these two primary pathways to legal operation as an insurance broker, as stipulated by the relevant regulations.

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 information, 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 scenario describes an insurance agent handling sensitive customer information outside the traditional workplace. The core principle here is the protection of personal data. The agent must ensure that this data is not exposed to unauthorized individuals. This aligns with the guidance provided for insurance agents working remotely or in public, emphasizing the need to safeguard customer privacy. Option (b) is incorrect because while general professionalism is important, it doesn’t specifically address the data protection aspect. Option (c) is incorrect as the focus is on preventing unauthorized access to data, not on the agent’s personal financial gain. Option (d) is incorrect because the primary concern is the confidentiality of customer data, not the efficiency of the sales process itself.

Terrorist financing, as defined by relevant legislation, involves the provision or collection of property with the intention or knowledge that it will be used, in whole or in part, to commit terrorist acts. This includes situations where property is made available to a known terrorist or associate, or where property is solicited for such individuals, even if the property is not ultimately used for a terrorist act. The key elements are the intent or knowledge regarding the use of the property for terrorism, or the provision of services to individuals associated with terrorism.

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 tip off a customer or other party about an ongoing investigation or suspicion of money laundering or terrorist financing (ML/TF). This involves training staff to recognize suspicious activities by understanding normal customer behavior and transaction patterns. When a suspicion arises, the FI must manage the Customer Due Diligence (CDD) process with extreme care to avoid any actions that could be construed as tipping off. This proactive approach is mandated by regulatory guidelines aimed at preserving the integrity of anti-money laundering efforts.

This question tests the understanding of the fundamental definition of a contract within the context of insurance. A contract is defined as a legally enforceable agreement. While an insurance policy serves as evidence of a contract, it is not the contract itself. The core of a contract lies in the mutual promises and undertakings that create legal obligations. Therefore, the most accurate and encompassing definition of a contract, as it relates to insurance and general legal principles, is a legally enforceable agreement.

The Code of Practice for the Administration of Insurance Agents, issued by the HKFI with the approval of the Insurance Authority, defines an ‘Insurance Agent’ as a person who holds themselves out to advise on or arrange contracts of insurance in or from Hong Kong 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). It also clarifies that this definition does not extend to Responsible Officers or Technical Representatives, who are distinct roles within the agency structure. Therefore, the most encompassing and accurate description of an ‘Insurance Agent’ according to the Code is a natural person or a business entity engaged in advising on or arranging insurance contracts.

Participating policies, also known as with-profit policies, offer policyholders a share in the profits of the insurance company. These profits are typically distributed in the form of bonuses. The question asks about the primary mechanism for distributing these profits to policyholders. While dividends are a form of profit distribution, in the context of participating life insurance, the term ‘bonus’ is specifically used to denote the share of profits allocated to policyholders. These bonuses can be paid in various forms, such as cash, reversionary additions to the sum assured, or used to reduce premiums. Therefore, bonuses are the direct manifestation of profit sharing in participating policies.

Guidance Note 6 (GN6) from the IARB clarifies the effective date of registration for insurance intermediaries. It explicitly states that no individual, including prospective or current insurance agents, Responsible Officers, or Technical Representatives, can act or present themselves as engaging in insurance agency business for a Principal before receiving written confirmation of their registration from the IARB. This confirmation is typically in the form of a Notice of Confirmation of Registration. Acting as an unregistered intermediary before this confirmation can lead to prosecution under Section 77 of the Insurance Ordinance. Therefore, the effective date of registration is the date specified by the IARB in this official notice.

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 Insurance Ordinance in Hong Kong 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 maintain clear lines of responsibility within the insurance industry. The regulation aims to ensure that intermediaries clearly represent either the insurer (as an agent) or the policyholder (as a broker), rather than attempting to serve both capacities, which could compromise their professional integrity and the advice provided to clients. Therefore, an individual acting as an appointed insurance agent for one insurer cannot also be an authorised insurance broker, even if they are dealing with different clients or different types of insurance.

This question tests the understanding of subrogation, specifically how it operates when an insurer has only partially indemnified a loss due to policy limitations. According to the principles of subrogation, if an insurer pays only a portion of the loss (e.g., due to a deductible or a policy limit), and the insured recovers an amount from a third party that covers the entire loss, the insurer is entitled to a portion of that recovery. This portion is typically proportional to the insurer’s contribution to the loss. The insured, having borne a part of the loss themselves, retains the right to any recovery that exceeds the total amount paid by the insurer and the insured’s own contribution. Therefore, the insurer can only recover up to the amount they have paid, and any excess belongs to the insured. The scenario describes a situation where the insurer paid HK$80,000 of a HK$100,000 loss, meaning the insured bore HK$20,000. If the third party pays HK$90,000, the insurer is entitled to HK$80,000 (their payout), and the remaining HK$10,000 goes to the insured, as this amount, combined with the insurer’s payout, still doesn’t fully cover the original loss from the insured’s perspective. The insured would then have recovered a total of HK$10,000 (from the third party) + HK$80,000 (from the insurer) = HK$90,000, still leaving them HK$10,000 out of pocket for the original HK$100,000 loss. The insurer cannot claim the full HK$90,000 because they only paid HK$80,000.

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. Clause 6.2.2c(d)(iii) defines a ‘Group of Companies’ in the context of the Code. It states that for the purposes of clause 22(b), the term means that the relationship between the companies is that of a subsidiary and holding company, or they are subsidiaries of another company. This definition is crucial for understanding how affiliations and corporate structures are assessed when determining an individual’s or entity’s fitness and properness to act as an insurance agent. Therefore, understanding the relationship between holding companies and their subsidiaries is key to correctly answering this question.

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 judgment in deciding whether to accept the risk or in 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, as this information would not negatively impact the insurer’s decision-making process. Therefore, failing to mention an automatic sprinkler system, which reduces the risk, does not constitute a breach of utmost good faith.

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 new business volume.

The HKFI’s ‘Guidelines on Complaint Handling’ emphasize that insurers must ensure customers are aware of how and where to lodge complaints. This includes making the internal complaint handling procedures readily available. Publishing these procedures, providing access in all offices, and supplying them freely to customers upon request or automatically to complainants are key components of this accessibility requirement. Informing new customers about the existence of these procedures is also a crucial step in ensuring transparency and customer awareness, aligning with the principle of making complaint resolution accessible.

Guidance Note 4 (GN4) issued by the IARB (now part of HKFI) provides specific directives on agent conduct to uphold integrity and protect consumers. A key requirement is that insurance agents must not accept blank or incomplete proposal forms from clients. Any necessary amendments to a form must be initialed by the customer to ensure transparency and prevent unauthorized alterations. This measure is crucial for safeguarding against misrepresentation and potential fraud, thereby maintaining customer trust and adherence to regulatory standards.

The Conduct of Insurance Agents for General Insurance Business and Restricted Scope Travel Business mandates specific professional behaviours. Agents are required to only provide 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 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 preventing misrepresentation. Therefore, all four listed points are essential components of an agent’s conduct.

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 area of expertise or seeking support when needed to ensure accurate and appropriate recommendations.

Renewal of an insurance contract is legally considered the creation of a new agreement, rather than a simple continuation of the old one. This means that the terms and conditions of the policy can be re-evaluated and potentially altered by the insurer at the time of renewal, subject to regulatory requirements and the terms of the original contract. Options B, C, and D describe different concepts within insurance: ‘Replacement’ refers to substituting a damaged item, ‘Risk Transfer’ is about shifting the financial burden of a risk, and ‘Salvage’ relates to recovering value from damaged property.

The scenario highlights a situation where a customer service department is tasked with handling a request for a duplicate policy. According to the syllabus, the Customer Servicing section is responsible for handling documentation requests such as duplicate policies, amendments, and copies of motor insurance certificates. While public relations and marketing are also mentioned in the syllabus, they are distinct functions. Marketing and Promotion focuses on external communications, media relations, advertising, and market research. Public relations, as a function within marketing, deals with the company’s overall image and external communications. Therefore, the most appropriate department to initially handle a request for a duplicate policy is Customer Servicing.

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. This contrasts with ordinary good faith, which only requires truthful answers to direct questions. The scenario describes an applicant failing to mention a pre-existing condition that is relevant to the policy, which is a classic example of non-fraudulent non-disclosure due to negligence or oversight, impacting the insurer’s assessment of risk.

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, with no single insurer exceeding 17% in any major class. This suggests a more fragmented market. Conversely, 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 share held by the top players, indicates a less evenly distributed market compared to General Business. Therefore, General Business is more evenly distributed among authorized insurers.

This question tests the understanding of an insurer’s obligations regarding its members’ financial statements and auditor reports, as stipulated by relevant regulations. Specifically, it focuses on the requirement for the insurer to verify that it has received financial statements and auditor’s reports from each member, and that these reports comply with membership rules. Furthermore, it requires the insurer to confirm that it has reviewed these reports and that no adverse statements or qualifications were present, except those explicitly noted in its own report. This ensures the overall financial health and compliance of the member entities within the insurer’s framework.

This question tests the understanding of how insurance business is classified for regulatory purposes in Hong Kong, specifically referencing the Insurance Companies Ordinance (Cap. 41). Class 8 pertains to property insurance covering fire and certain other perils like storms and explosions. Class 9 covers property insurance excluding those in Class 8. Motor vehicle liability (Class 10) deals with third-party motor insurance, including compulsory coverage. General liability (Class 13) encompasses various liability insurances, excluding specific classes like motor and aircraft, and importantly, includes employees’ compensation insurance. Therefore, a policy covering an employer’s legal obligation to compensate employees for work-related injuries falls under the General Liability classification.

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 registration applications will not be processed until proof of compliance is provided. This directly aligns with the consequence of non-compliance for failing to respond to such a request.

The core principle here is that Financial Institutions (FIs) must establish robust internal controls to prevent their employees, including appointed insurance agents, from inadvertently or intentionally revealing information that could tip off a customer or another party about an ongoing anti-money laundering (AML) or counter-terrorist financing (CFT) investigation. This involves training staff to recognize suspicious activities by understanding customer behavior and transaction patterns, and to conduct Customer Due Diligence (CDD) in a manner that avoids raising suspicion. The Guideline emphasizes that FIs are responsible for ensuring their staff are adequately trained and aware of these sensitivities, particularly during the CDD process when a suspicion has been formed. Therefore, the most comprehensive and accurate statement is that FIs must implement internal controls and training to prevent tipping off, ensuring staff are sensitive to this risk during CDD.

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 personal data. Its scope is not limited to either the public or private sector exclusively. Instead, it applies to any person or organization that collects, holds, or processes personal data in Hong Kong, regardless of whether they are a government body, a statutory corporation, or a private enterprise. Therefore, both public and private sectors fall under the purview of the PDPO.