IIQE Paper 1 Principles and Practice of Insurance Examination Quiz 67

The Insurance Authority (IA) has the power to impose further disciplinary or other actions on a Principal or Registered Person, including the respondent’s appointing Insurance Agent, if they fail to comply with a requirement to take disciplinary or other action. This is a direct consequence outlined in the regulatory framework for insurance intermediaries, specifically addressing non-compliance with disciplinary directives. The IA’s role is to ensure adherence to the Code of Conduct and to maintain market integrity. Options B, C, and D describe actions that are either outside the IA’s direct purview in this specific context or misrepresent the nature of the IA’s enforcement powers regarding non-compliance with disciplinary actions.

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 focus on broader company image and external communications, not direct customer requests for policy-related information or documents. Complaints handling is a distinct function, and while it might involve liaison, it’s not the primary area for a request for a duplicate policy. Therefore, the Customer Servicing department is the most appropriate area to handle this customer’s needs.

The Insurance Authority (IA) has the power to impose further disciplinary or other actions on a Principal or Registered Person, including the respondent’s appointing insurance agent, if they fail to comply with a requirement to take disciplinary or other action. This is a direct consequence outlined in the regulatory framework for insurance intermediaries, emphasizing accountability within the industry. The IA’s role is to ensure compliance and maintain professional standards, and this power allows them to enforce such requirements effectively.

The Insurance Authority (IA) mandates that travel insurance agents, their responsible officers (ROs), and technical representatives (TRs) must complete 3 Continuing Professional Development (CPD) hours annually, starting from August 1, 2008. This requirement is crucial for maintaining their registration status. Failure to meet this requirement can lead to revocation of registration. Specifically, a first-time failure to meet CPD hours typically results in a 3-month revocation, with a requirement to complete outstanding hours upon re-registration. Making a false declaration regarding CPD hours carries a more severe penalty of a 12-month revocation, also requiring completion of outstanding hours. Non-response to requests for proof of compliance will also lead to revocation for a period determined by the IA, and future applications will be contingent on providing proof of compliance.

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 review by the IA regarding both the quantity and the collectability of the reinsurance. The IA has specific guidelines, such as the ‘Guideline on Reinsurance with Related Companies,’ to address potential conflicts of interest and ensure the protection of policyholders when reinsurance is placed with affiliated entities. Therefore, ensuring the quality and collectability of reinsurance is a primary concern for regulatory oversight.

The core of underwriting in general insurance, unlike life insurance, is its dynamic nature. Because general insurance policies are 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 contract is typically fixed for its duration and underwriting is a one-time assessment.

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 is typically achieved by assessing the market value of the damaged or destroyed item at the time of the loss. Replacement cost, while sometimes an option, is not the universal or primary method of indemnity. Actual cash value (ACV) is a common method that accounts for depreciation, reflecting the item’s value at the time of loss. Agreed value is used for specific items where market value is difficult to determine and agreed upon beforehand. Salvage value is the residual value of damaged property, which is deducted from the payout, not the basis of the payout itself.

The scenario describes a situation where a registered person is advising a potential policyholder. According to the Conduct of Registered Persons, specifically section 6.2.2g (a)(iii)(6), a registered person has a duty to explain the policy cover recommended to ensure the potential policyholder understands what they are purchasing. This includes clarifying benefits, exclusions, and any other relevant terms. Simply stating that the policy is ‘comprehensive’ without detailing its specific features and limitations would not fulfill this obligation, as it could lead to a misunderstanding of the coverage.

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 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 the definition of an offer in contract law, which is a separate concept. Option D describes a performance bond, which is a type of guarantee and not directly related to disclosure obligations in insurance contracts.

The United Nations (Anti-Terrorism Measures) Ordinance (UNATMO) empowers the Secretary for Security to freeze assets suspected of being linked to terrorism. Section 4 of the UNATMO specifically prohibits providing property or financial services to or for the benefit of a terrorist or terrorist associate without a license. The question describes a scenario where a financial institution (FI) is asked to facilitate a transaction for an individual whose name appears on a list of individuals associated with a designated terrorist organization. This directly triggers the FI’s obligation under the UNATMO to cease dealings with such property and individuals unless a specific license is obtained. Therefore, the FI must refuse the transaction and report the suspicion to the Joint Financial Intelligence Unit (JFIU). Option B is incorrect because while reporting is necessary, refusing the transaction is the immediate action required. Option C is incorrect because the FI cannot unilaterally decide to proceed with the transaction; it requires explicit authorization. Option D is incorrect as the FI’s primary obligation is to comply with the UNATMO and report suspicious activities, not to seek advice from the customer.

An insurance broker has a fundamental duty to prioritize their client’s interests above all other considerations. This principle is paramount in all dealings, including advice and the arrangement of insurance contracts. Limiting a client’s choices of insurers without a valid reason would contravene this duty by potentially prejudicing the client’s ability to secure the most suitable coverage. Similarly, being overly reliant on a single insurer could lead to a lack of objective advice, as the broker’s own business interests might inadvertently influence recommendations. Therefore, maintaining independence and offering a broad spectrum of options are crucial for upholding the client’s best interests.

The Insurance Complaints Committee (ICCB) Panel has the authority to review complaints against insurers. While the terms of the insurance policy are paramount, the Panel can deviate from a strict interpretation if doing so would result in an outcome that is unfair or unreasonable to the complainant. This power is derived from the ICCB’s Articles of Association, which mandate the Panel to consider general principles of good insurance practice, applicable laws, and guidelines from bodies like the Hong Kong Federation of Insurers (HKFI). The Code of Conduct for Insurers, particularly Part III on Claims, emphasizes efficient, speedy, and fair claims handling. Therefore, the Panel’s assessment of fairness in claim settlement is a key aspect of its function, allowing it to look beyond the literal policy wording when circumstances warrant.

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, disclosing the relevant acts. This defence is specifically linked to the act of reporting, not to a general obligation to prevent terrorism financing. Therefore, while a financial institution must have robust AML/CFT systems, the direct statutory defence under UNATMO for the act of providing property or services to terrorists is contingent upon reporting to the JFIU.

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. Inwards 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.

This question tests the understanding of how proximate cause operates when multiple perils are involved in a loss, specifically focusing on the interplay between insured and uninsured perils. According to the principles of proximate cause, if an uninsured peril leads to an insured peril, and the insured peril is the direct cause of the loss, the loss is generally recoverable. In this scenario, the accidental fire (insured peril) caused the water damage (uninsured peril). The proximate cause of the water damage is the fire, which is an insured peril under a standard fire policy. Therefore, the loss is covered.

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 insurance, but for life insurance, it is only required at the inception of the policy. A person has an insurable interest in their own life, spouse’s life, and the life of a child or ward under 18. While a parent generally has an insurable interest in their adult child’s life due to potential financial or emotional support, this interest is not automatically presumed to be as direct or substantial as in the case of a spouse or a minor child. Therefore, without further evidence of financial dependence or specific legal guardianship, an adult child’s life is not typically considered to have an insurable interest for a parent in the same way as a spouse or a minor. The question tests the understanding of the scope of insurable interest in personal insurance, specifically focusing on familial relationships beyond the immediate nuclear family and the requirement of financial dependence.

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 B is incorrect because it limits the scope to only one type of business. Option C is incorrect as it refers to an insurer that only handles claims, not the underwriting of different business types. Option D is incorrect because it describes an insurer that exclusively deals with reinsurance, which is a different category.

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) with sensitivity to the risk of tipping off. The guideline emphasizes that FIs are responsible for ensuring their staff, including agents, are adequately trained and aware of these obligations. Therefore, an FI must ensure its appointed agents have the necessary systems and processes to comply with record-keeping requirements and that these records are readily accessible to regulatory authorities, as the agents are considered to have deposited these records with the insurer.

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 Insurance Ordinance (Cap. 41) mandates that any entity wishing to conduct insurance business in or from Hong Kong must first obtain authorization from the Insurance Authority (IA). This authorization process involves meeting specific minimum requirements set by the Ordinance, which include aspects like paid-up capital, solvency margin, the suitability of directors and controllers, and adequate reinsurance arrangements. The IA also issues Guidelines to further assess an applicant’s financial soundness and ongoing suitability. Therefore, operating an insurance business without this prior authorization from the IA is a violation of the regulatory framework.

Guidance Note 4 (GN4) issued by the IARB (Insurance Agents Registration Board) provides specific directives for insurance agents to ensure customer protection and ethical conduct. One of these directives explicitly states that insurance agents must not allow customers to sign blank or incomplete forms. Any modifications to a form must be initialed by the customer to prevent potential misrepresentation or forgery. Therefore, an agent asking a client to sign a partially filled proposal form would be in breach of this guidance.

Subrogation is a legal principle that allows an insurer, after paying a claim to an insured, to step into the shoes of the insured and pursue any rights the insured may have against a third party responsible for the loss. The insurer’s recovery under subrogation is limited to the amount it paid out in indemnity. In this scenario, the insurer paid HK$50,000 for the damage caused by the faulty wiring. Therefore, the insurer’s subrogation rights against the electrical contractor are limited to recovering the HK$50,000 it paid, not the full HK$70,000 the insured might have claimed from the contractor. The insured’s potential claim against the contractor for the full amount of damage is a separate matter, but the insurer’s recovery is capped by its payout.

The Insurance Ordinance (Cap. 41) in Hong Kong categorizes insurance business into two primary segments: General Business and Long Term Business. General business encompasses a wide array of non-life insurance products, such as property, motor, and liability 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 the risk profiles and operational characteristics of these two categories differ significantly. Therefore, ‘Long Term Business’ is the correct counterpart to ‘General Business’ as defined by the Ordinance.

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 does not encompass Responsible Officers or Technical Representatives, who are defined separately in relation to the agency structure. Therefore, the most accurate and comprehensive description of an ‘Insurance Agent’ under the Code is one that encompasses both individual natural persons and entities acting as intermediaries for insurers.

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 Complaints Committee (ICCB) Panel has the authority to review complaints against insurers. While the terms of the insurance policy are paramount, the Panel can deviate from a strict interpretation if doing so would result in an outcome that is unfair or unreasonable to the complainant. This power is derived from the ICCB Articles of Association, which mandate the Panel to consider general principles of good insurance practice, applicable law, and guidelines from bodies like the Hong Kong Federation of Insurers (HKFI). The Code of Conduct for Insurers, particularly Part III on Claims, emphasizes efficient, speedy, and fair claims handling. Therefore, the Panel’s assessment of fairness in claim settlement is a key aspect of its function, allowing it to look beyond the literal policy wording when circumstances warrant.

The Insurance Agents Registration Board (IARB) has specific requirements for processing applications for registration. According to the provided text, the IARB is not obligated to review an application if it is not submitted in the correct format, is incomplete, or if requested information has not been fully provided. This emphasizes the importance of adhering to the prescribed procedures and ensuring all necessary documentation is submitted for the application to be considered.

The scenario describes a situation where a customer is seeking clarification on their existing policy, specifically requesting a duplicate policy document and an amendment to their coverage details. According to the provided syllabus, the Customer Servicing department is responsible for handling such requests, including the issuance of duplicate policies and processing amendments to existing policies. While Marketing and Promotion might be involved in the broader image and external communications, and Insurance Sales focuses on new business and sales enhancement, the direct handling of policy documentation requests falls under the purview of Customer Servicing.

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 the proposer has a duty to disclose, certain facts are exempt from this requirement when no inquiry is made. These exemptions include matters of common knowledge, facts already known to the insurer, and facts that diminish the risk. In this scenario, the presence of an automatic sprinkler system is a fact that would likely influence the premium calculation by reducing the risk. Therefore, its non-disclosure, in the absence of a specific question about it, does not constitute a breach of utmost good faith because it diminishes the risk.

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 ensuring compliance. These ‘other means’ are not explicitly defined but generally encompass non-contractual oversight and auditing mechanisms. Therefore, implementing robust internal policies and conducting regular audits, even without a formal contract, can serve as a valid ‘other means’ to fulfill the data user’s obligations under the PDPO.