IIQE Paper 1 Principles and Practice of Insurance Examination Quiz 71

This question tests the understanding of an insurer’s obligations regarding the financial health and compliance of its members, as stipulated by relevant regulations. Specifically, it focuses on the requirement for an insurer to verify that its members have submitted their financial statements and auditor’s reports according to the membership rules. The correct answer highlights the insurer’s responsibility to ensure these submissions are received and that the auditor’s reports contain no adverse or qualified statements, except those explicitly noted by the insurer in its own report. This demonstrates a proactive approach to risk management and regulatory compliance by the insurer, ensuring the integrity of its membership base.

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 product development within the insurance industry, specifically focusing on how insurers adapt to market dynamics. Product research is the systematic process of identifying and evaluating new insurance products or modifications to existing ones. This involves analyzing market trends, competitor offerings, and customer needs to ensure the insurer’s product portfolio remains competitive and relevant. Developing new forms of cover or enhancing existing ones, as described in the syllabus, is a direct outcome of effective product research. Options B, C, and D describe related but distinct activities. While underwriting is crucial for pricing and accepting risk, it’s a post-product development function. Claims management deals with the processing of losses after they occur. Actuarial analysis is a component of product development and pricing but doesn’t encompass the entire scope of market-driven product evolution.

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.

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 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 core issue of the registered person’s knowledge base when providing advice.

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.

In life insurance underwriting, the process is typically a one-time assessment because the insurer cannot unilaterally cancel the policy. Any changes to the policy terms or coverage after issuance generally require the policyholder’s consent. This contrasts with general insurance, where policies are subject to renewal and can be adjusted or cancelled by the insurer at renewal, allowing for a more continuous underwriting approach. Therefore, the initial underwriting in life insurance is a critical, singular event that sets the terms for the contract’s duration.

Principle 6 of the Personal Data (Privacy) Ordinance (PDPO) grants data subjects the right to access and correct their personal data. This means an individual can request a copy of the information an insurer holds about them, and if they find it inaccurate, they can ask for it to be corrected. The example provided in the study material directly illustrates this right by stating a customer can ask an insurer to supply a copy of their personal data contained within their policy. Options B, C, and D describe other data protection principles or actions not directly related to the right of access and correction.

This question tests the understanding of vicarious liability in the context of data protection under Hong Kong law. The Personal Data (Privacy) Ordinance (PDPO) holds data users responsible for the actions of their data processors. Therefore, if a data processor infringes on a data subject’s privacy, the data subject can seek recourse from the data user, who is considered liable as the principal. The contract between the data user and data processor can serve as evidence of compliance, but it does not absolve the data user of their primary responsibility to the data subject. The data processor itself is not directly liable to the data subject for the infringement.

The Insurance Claims Complaints Bureau (ICCB) has a panel that can make awards against insurers. This panel has the authority to award compensation up to HK$800,000. Crucially, the insurer against whom an award is made does not have the right to appeal this decision. However, the complainant, if dissatisfied with the award, retains the option to pursue legal recourse.

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. Therefore, implementing robust internal policies and conducting regular audits of the data processor’s practices, even without a specific contractual clause for each point, can be considered an ‘other means’ of ensuring compliance with data protection requirements.

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 proactive steps an insurer must take to ensure compliance and identify potential issues. Option (a) is correct because the insurer is mandated to verify receipt of financial statements and auditor’s reports from all its members, ensuring adherence to membership rules. Option (b) is incorrect as the insurer’s responsibility extends beyond merely receiving the reports; it involves a review process. Option (c) is incorrect because while reviewing auditor reports is crucial, the primary obligation is to ensure receipt and then review for adverse statements. Option (d) is incorrect as the insurer’s duty is to review reports for adverse statements or qualifications, not to proactively seek out additional information beyond what is submitted.

This question tests the understanding of vicarious liability in the context of data protection under Hong Kong law. The Personal Data (Privacy) Ordinance (PDPO) holds data users responsible for the actions of their data processors. Therefore, if a data processor infringes on a data subject’s privacy, the data subject can seek recourse from the data user, who is considered liable as the principal for the data processor’s wrongful acts. The contract between the data user and data processor can serve as evidence of compliance but does not absolve the data user of primary responsibility to the data subject.

The Insurance Ordinance (Cap. 41) in Hong Kong categorizes insurance business into two primary divisions: General Business and Long Term Business. General Business encompasses a wide array of non-life insurance products, such as property, casualty, and marine insurance. Long Term Business, conversely, deals with insurance contracts that are expected to remain in force for extended periods, typically involving life insurance, annuities, and permanent health insurance. The distinction is crucial for regulatory purposes, including capital requirements and solvency margins, as outlined in the Insurance Ordinance.

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 constitute an offence under Section 77 of the Insurance Ordinance, potentially leading to criminal prosecution. Therefore, the effective date of registration is the date specified by the IARB in this official confirmation notice.

This question tests the understanding of how an agency agreement is terminated due to a fundamental breach by one of the parties. According to agency law principles, if either the principal or the agent commits a significant violation of the contract’s terms, the non-breaching party has the right to consider the agreement terminated. This termination can be immediate, and the aggrieved party may also seek compensation for any losses incurred due to the breach, such as lost profits. The scenario describes a situation where an exclusive agent discovers the principal has appointed another agent before the agreed-upon term, which constitutes a fundamental breach of the exclusivity clause. Therefore, the agent can end the contract and claim damages for the expected profits.

The Insurance Companies Ordinance (Cap. 41) mandates that insurance brokers maintain records that adequately explain all transactions, accurately reflect their financial standing, and facilitate the preparation of financial statements that present a true and fair view. These records must be detailed enough to separately account for all dealings with insurers, clients, and the broker themselves, as well as all income and expenses, and the broker’s assets and liabilities. The requirement for records to be retained for at least 7 years is a specific regulatory stipulation to ensure accountability and facilitate audits.

A contract is fundamentally a legally binding agreement. While many agreements exist in daily life, not all are intended to have legal consequences, such as a casual social arrangement. The core of a contract involves promises exchanged between parties, where each party expects these promises to be upheld. The insurance policy itself is not the contract but rather the documented evidence of the contractual agreement between the insurer and the insured. The validity of a contract hinges on the presence of essential elements, and if any are missing, the agreement may be considered defective or non-existent in the eyes of the law.

The Insurance Companies Ordinance (Cap. 41) mandates that insurance brokers maintain records that adequately explain all transactions, accurately reflect their financial standing, and facilitate the preparation of financial statements that present a true and fair view. These records must also be suitable for auditing. Specifically, brokers must keep detailed records of all transactions involving insurers, clients, and themselves, as well as all income and expenses, and their assets and liabilities. These records are required to be retained for a minimum of seven years. Therefore, the primary purpose of these record-keeping requirements is to ensure transparency, accountability, and the ability to audit the broker’s financial activities and overall business health.

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 conduct this specific type of business.

Guidance Note 4 (GN4) issued by the IARB (now part of HKFI) provides specific directives for insurance agents to uphold integrity and protect policyholders. A key requirement is that agents must not accept blank or incomplete proposal forms from clients. Any modifications made to a form after the client has signed must be acknowledged and initialed by the client to prevent unauthorized alterations and potential fraud. This ensures transparency and client consent throughout the application process, aligning with the principle of conducting business in good faith.

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

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. This function is crucial for maintaining standards and consumer protection within the insurance intermediary sector in Hong Kong. While the Insurance Ordinance provides the overarching legal framework for the insurance industry, and the Insurance Claims Complaints Bureau and Panel deal with specific claim-related disputes, the IARB’s mandate is specifically focused on the registration and conduct of agents.

Guidance Note 6 (GN6) clearly states that an individual cannot act or present themselves as an insurance agent, responsible officer, or technical representative for a principal before receiving written confirmation of their registration from the IARB. Acting in such a capacity prior to the specified effective date in the Notice of Confirmation of Registration constitutes a potential offense under Section 77 of the Insurance Ordinance, leading to criminal prosecution. Therefore, the earliest an individual can legally commence such activities is on the date specified by the IARB in their confirmation notice.

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 the term ‘Insurance Agent’ for the purposes of the Code does not encompass a Responsible Officer or a Technical Representative, as these are distinct roles within the structure of an insurance agency or for an individual agent.

The Insurance Authority (IA) Code of Conduct outlines the requirements for individuals and entities to be considered ‘fit and proper’ to engage in the insurance business. Clause 6/31 (ix) specifically states that a person must have passed the relevant papers of the Insurance Intermediaries Qualifying Examination (IIQE) recognized by the IA, unless exempted. This is a fundamental qualification for registration. While other factors like age, residency, and compliance with regulations are important, passing the IIQE is a direct requirement for demonstrating competence and knowledge necessary for the role, as stipulated by the IA.

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 the benefits and limitations of the product they are purchasing. Therefore, all four listed points are essential components of the conduct expected of insurance agents.

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. Therefore, reporting suspicious activities to the JFIU is a crucial step to avoid liability under the UNATMO for actions disclosed in the report.

This question tests the understanding of how an agency agreement is terminated due to a fundamental breach by one of the parties. According to agency law principles, if either the principal or the agent commits a significant violation of the contract’s terms, the non-breaching party has the right to consider the agreement terminated. This termination can be immediate, and the aggrieved party may also seek compensation for any losses incurred due to the breach, such as lost profits. The scenario describes a situation where an exclusive agent discovers the principal has appointed another agent before the agreed-upon term, which constitutes a fundamental breach of the exclusivity clause. This allows the agent to end their performance and claim damages.