IIQE Paper 1 Principles and Practice of Insurance Examination Quiz 70

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 contrary to this duty, as it restricts the client’s ability to secure the most suitable coverage. Similarly, being overly reliant on a single insurer could compromise the broker’s ability to offer the best options, potentially disadvantaging the client. Therefore, maintaining independence and offering a broad range of suitable choices are essential components of acting in the client’s best interest.

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 relates to ‘Policy Limits’, which define the maximum payout, not the duty of disclosure. Option D describes ‘Peril’, the cause of a loss, which is distinct from the duty to disclose information.

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 inquiry is made. In this scenario, the presence of an automatic sprinkler system reduces the risk of fire, and therefore, its non-disclosure, in the absence of a specific question about protective measures, does not constitute a breach of utmost good faith. The other options describe situations that would typically require disclosure as they are likely to influence an insurer’s decision-making process.

The principle of insurable interest is fundamental to the validity of an insurance contract. It requires that the policyholder must have a legally recognized financial stake in the subject matter of the insurance. This means that the policyholder would 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 (often presumed), and their property. A creditor generally has an insurable interest in the life of their debtor, but not necessarily in the debtor’s property unless it’s collateral. The question tests the understanding of this core principle by presenting a scenario where a financial relationship exists but the legal recognition of that relationship for insurance purposes is absent.

The question tests the understanding of the minimum paid-up capital requirements for authorized insurers in Hong Kong, specifically differentiating between general business, long term business, and composite insurers. The provided text states that a general business insurer requires HK$10 million in paid-up capital. A long-term business insurer requires HK$2 million. A composite insurer, which carries on both general and long-term business, requires HK$20 million. A captive insurer has a lower requirement of HK$2 million. Therefore, an insurer carrying on both general and long-term business (composite) must meet the higher requirement of HK$20 million.

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 concerning direct marketing.

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 in advising clients, and failure to do so, resulting in financial loss for the client, can constitute professional negligence. This liability necessitates professional indemnity insurance to cover potential claims. An insurance agent, on the other hand, typically acts as a representative of the insurer, and their duty of care to the policyholder is generally considered lower unless they profess specialized skills. Consequently, insurance agents are not statutorily mandated to carry professional indemnity insurance, unlike brokers.

The Insurance Authority (IA) is responsible for overseeing the conduct of insurance intermediaries. When an applicant for registration as a Registered Person is undergoing the approval process, the appointing Principal or Insurance Agent has a duty to inform the IA of any changes in the applicant’s circumstances that might influence the IA’s decision. This proactive disclosure is crucial for maintaining the integrity of the registration process and ensuring that only fit and proper individuals are registered. Failure to provide such information could lead to the application being rejected or, if registered, potential disciplinary action.

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 Agency’ is specifically defined as a business operating as a sole proprietorship, partnership, or corporation that acts as an insurance agent. This distinguishes it from an ‘Individual Agent’ who is a natural person. The definition of ‘Insurance Agent’ itself is broad, encompassing anyone holding themselves out to advise on or arrange insurance contracts as an agent or sub-agent of one or more insurers, and importantly, it includes both ‘Individual Agents’ and ‘Insurance Agencies’ but explicitly excludes Responsible Officers and Technical Representatives from its primary definition, as these roles are defined in relation to the agents themselves.

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 financial health and stability of the insurer, directly impacting its security, potential returns, and liquidity to meet financial obligations. Therefore, the investment of company assets is the most significant responsibility from the perspective of the accountant’s role in safeguarding the insurer’s financial well-being.

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 broad and encompasses both the public and private sectors. This means that government departments, statutory bodies, as well as commercial enterprises and individuals who handle personal data, are all subject to the provisions of the PDPO. Therefore, the ordinance applies to all entities that collect and process personal data, regardless of whether they operate in the public or private domain.

The Insurance Claims Complaints Bureau (ICCB) is established to handle complaints from individual policyholders concerning personal insurance claims. The Insurance Claims Complaints Panel, appointed by the ICCB, is responsible for adjudicating these complaints. The Panel has the authority to make awards against insurers, with a maximum award limit of HK$800,000. Crucially, insurers cannot appeal an award made by the Panel. However, a complainant who is dissatisfied with the Panel’s decision retains the right to pursue legal recourse.

The principle of legality is a fundamental requirement for any contract to be legally binding. This means that the purpose and subject matter of the agreement must not be against any existing laws or public policy. If a contract’s objective is illegal, such as an agreement to commit a crime or to engage in activities prohibited by statute, it is considered void and unenforceable from the outset. This principle ensures that the legal system does not lend its authority to agreements that undermine societal order or statutory provisions. Therefore, an agreement to sell counterfeit goods, which is an illegal activity, would render the contract unenforceable due to a breach of the legality requirement.

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.

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: ‘Replacement’ involves substituting a damaged item, ‘Risk Transfer’ is about shifting the financial burden of a risk, and ‘Salvage’ refers to the remaining value of damaged property or a reward for rescue.

Guidance Note 4 (GN4) issued by the IARB (now part of the HKFI) provides specific directives for insurance agents to uphold integrity and protect policyholders. A key requirement is that all policy-related documents must be fully completed before a customer signs them. Furthermore, any amendments made to these documents after the customer has signed must be initialled by the customer to acknowledge and approve the changes. This prevents potential disputes arising from incomplete or altered forms, safeguarding against misrepresentation or forgery. Therefore, an agent asking a client to sign a blank proposal form would be in direct violation of this guidance.

The Conduct of Insurance Agents for General Insurance Business and Restricted Scope Travel Business mandates specific professional behaviours. Agents are required to identify themselves clearly before engaging in any business discussions to ensure transparency and build trust. Furthermore, they must provide advice only within their areas of expertise and competence, preventing misrepresentation or unsuitable recommendations. A crucial aspect of their duty is to explain policy coverage accurately and ensure the client comprehends the terms and benefits of the insurance product they are purchasing. While comparing policies is often part of the sales process, the primary obligation is to explain the specific policy being offered and its implications for the client, rather than focusing solely on comparative differences. Therefore, all four listed points are essential components of an agent’s conduct.

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 taken, 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.

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 a party deliberately conceals information, which is fraudulent non-disclosure. Option C refers to ordinary good faith, which only requires truthful answers to specific questions, not proactive disclosure of all material facts. Option D describes a situation where the insurer fails to provide a policy document, which is a different contractual issue.

Participating policies, also known as with-profit policies, offer policyholders a share in the insurer’s profits. These profits are typically distributed in the form of bonuses. Bonuses can be reversionary (added to the sum assured and payable at death or maturity) or cash bonuses (paid directly to the policyholder). The question asks about the primary mechanism through which policyholders benefit from the insurer’s profits in such policies. While dividends are a form of profit distribution, in the context of participating life insurance, the term ‘bonus’ is more specifically used to describe the distribution of profits to policyholders. These bonuses are declared periodically by the insurer based on its financial performance and are added to the policy’s value. Therefore, bonuses are the direct manifestation of profit sharing for policyholders of participating policies.

Insurable interest is a fundamental principle in insurance, requiring the policyholder to have a legitimate financial stake in the subject matter of the insurance. This interest must exist at the time of the loss for indemnity to be payable. In the context of a landlord insuring against loss of rent due to fire, the landlord has a direct financial interest in receiving rent payments. If a fire prevents the tenant from occupying the property, the landlord suffers a direct financial loss of rent. Therefore, the landlord possesses insurable interest in the rental income stream, which is a legal right that can be insured.

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 vigilant about suspicious circumstances, doubtful documentation, or verbal cues that suggest a claim might be fraudulent. The intermediary’s role is to support the insurer and the law in combating fraud, but it’s crucial to act with sensitivity and avoid making direct accusations of fraud, as that is the insurer’s primary responsibility. Therefore, reporting suspicious claims to the insurer aligns with the intermediary’s ethical and legal obligations.

The question tests the understanding of an insurance broker’s record-keeping obligations under Hong Kong regulations, specifically the requirement to retain records for a minimum period. The provided text states that records must be retained for ‘not less than 7 years’. Therefore, any period shorter than this would be non-compliant. Option (a) correctly identifies the minimum retention period. Option (b) is incorrect as it is less than the required period. Option (c) is also incorrect as it is less than the required period. Option (d) is incorrect as it is less than the required period.

Insurable interest is a fundamental principle in insurance, requiring the policyholder to have a legitimate financial stake in the subject matter of the insurance. This interest must exist at the time of the loss for indemnity to be payable. In the context of a landlord insuring against loss of rent due to fire, the landlord has a direct financial interest in receiving rent payments. If a fire prevents the tenant from occupying the property, the landlord suffers a direct financial loss of rent. Therefore, the landlord possesses insurable interest in the rental income stream, which is a legal right that can be insured.

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. This section details various requirements and limitations that an individual must meet to be considered suitable for registration. Specifically, it addresses situations where an individual might be deemed not fit and proper, such as having a history of fraudulent activities or lacking the necessary integrity. Option A correctly identifies that a history of fraudulent misrepresentation or non-disclosure, which are breaches of utmost good faith, would directly impact an individual’s fitness and properness according to regulatory standards. Options B, C, and D describe situations that, while potentially relevant to insurance operations, do not directly address the core criteria for an individual’s personal suitability and integrity as defined by the ‘Fitness and Properness’ guidelines.

This question tests the understanding of the fundamental requirement of insurable interest in insurance contracts, as outlined in the Insurance Ordinance. Insurable interest signifies a legally recognized relationship between the policyholder and the subject matter of the insurance, such that the policyholder would suffer a financial loss if the insured event occurs. Without this legally recognized connection, the insurance contract is considered void. Option (a) correctly identifies this core principle. Option (b) is incorrect because while a financial loss is a consequence, the primary requirement is the legally recognized relationship itself. Option (c) is incorrect as it focuses on the mere existence of a financial relationship, which is insufficient without legal recognition. Option (d) is incorrect because it suggests that any financial loss is enough, ignoring the crucial element of legal recognition.

The Insurance Claims Complaints Bureau (ICCB) is a self-regulatory body established by the insurance industry in Hong Kong. Its primary function is to handle complaints from individual policyholders concerning claims arising from personal insurance contracts with its member insurers. The ICCB’s Insurance Claims Complaints Panel, which handles these complaints, has the authority to make awards against insurers. The maximum award amount the Panel can make is HK$800,000. Insurers cannot appeal an award made by the Panel. However, a complainant who is dissatisfied with the Panel’s award can pursue legal recourse. The Insurance Authority (IA) is the statutory regulator of the insurance industry in Hong Kong, responsible for licensing, supervision, and enforcement, but it does not directly handle individual claims complaints in the same manner as the ICCB. The Insurance Agents Registration Board (IARB) is responsible for the registration and discipline of insurance agents.

The scenario describes an insurance practitioner moving to a new company and taking copies of their former employer’s customer policy information. This action directly violates the principle of lawful and fair means of data collection and the prohibition against changing the purpose of data use. Specifically, using data collected for one purpose (servicing policies at the former employer) for a new purpose (marketing for the new employer) without consent is a breach. The guidance note emphasizes that an individual should not make copies of customer information from their former employer’s records when changing jobs, as this information was collected for the original employer’s purposes and using it for a new employer’s marketing is a change in purpose and potentially an unfair collection method.

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. Unlike insurance agents, who primarily represent the insurer and may not profess the same level of specialized expertise to policyholders, brokers are expected to prioritize the client’s interests and provide impartial advice. Consequently, brokers are typically required to maintain Professional Indemnity Insurance to cover potential claims arising from such negligence, whereas this is not a statutory requirement for insurance agents.

This question tests the understanding of the fundamental principle of indemnity in insurance, specifically how it applies to the valuation of a loss. The principle of indemnity aims to restore the insured to the financial position they were in immediately before the loss occurred, without allowing for a profit or a greater loss. In the context of property insurance, this typically means the market value of the property at the time of the loss, or the cost to repair or replace it with similar property, whichever is less, to avoid over-indemnification. Option (b) is incorrect because it suggests a profit motive, which is contrary to indemnity. Option (c) is incorrect as it implies a fixed value regardless of market conditions, which is not how indemnity is usually applied. Option (d) is incorrect because while replacement cost might be considered, it’s usually capped by the actual cash value or the sum insured, and the primary goal is to prevent profit from a loss.