IIQE Paper 1 Principles and Practice of Insurance Examination Quiz 66

This question tests the understanding of apparent authority in agency law, specifically how a principal can be bound by an agent’s actions even if those actions exceed their actual authority. Apparent authority arises when the principal’s conduct leads a third party to reasonably believe that the agent has the authority to act. In the scenario, the principal’s consistent issuance of policies for cargo risks to West Africa, despite explicitly forbidding the agent from accepting them, creates the impression for the client that the agent possesses the authority to grant such cover. This consistent past behaviour by the principal, communicated to the third party through the agent’s actions and the principal’s subsequent validation, establishes apparent authority. The agent’s actions, therefore, bind the principal because the principal’s conduct created the appearance of authority in the eyes of the third party, even though the agent acted contrary to express instructions.

This question tests the understanding of how insurance institutions should manage customer data when agents operate outside the traditional workplace. The key principle is to protect personal information from unauthorized access or disclosure. This involves both the agent’s responsibility to be discreet and the institution’s duty to provide clear guidelines and policies. Option (a) correctly identifies the need for both individual vigilance and institutional support in safeguarding data privacy in such scenarios, aligning with the guidance provided for insurance agents working remotely or in public.

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 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 making property or financial services available 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 aware that a client’s funds are derived from illicit activities that could fund terrorism. Failing to report this suspicion to the Joint Financial Intelligence Unit (JFIU) would be a contravention of the FI’s obligations under anti-terrorism financing regulations. The UNATMO mandates reporting of suspicious activities related to terrorism. Therefore, the FI must report the suspicion to the JFIU.

The Insurance Authority (IA) mandates that insurance brokers submit annual audited financial statements and an auditor’s report within six months of their financial year-end. This auditor’s report must confirm compliance with specific minimum requirements, including those related to the broker’s financial standing, operational capabilities, and professional conduct. These submissions are crucial for the IA to assess the broker’s ongoing fitness and propriety to conduct business, ensuring client protection and market integrity. Failure to submit these documents accurately and on time can lead to regulatory action.

This question tests the understanding of an insurance intermediary’s role in preventing corruption and fraud, specifically referencing the ICAC’s initiatives and the ‘Practical Guide on Professional Ethics for Life Insurance Intermediaries’. The ICAC provides free, confidential services, including best practice packages and advice, to help organizations prevent corruption. For the insurance industry, they offer training and have collaborated on a guide to enhance ethical conduct and reduce regulatory violations. Therefore, familiarizing oneself with the Ordinance, ICAC’s best practices, and the ethical guide are crucial steps for intermediaries to prevent corrupt conduct.

The Insurance Authority (IA) has established specific consequences for Registered Persons (RPs) who fail to comply with Continuing Professional Development (CPD) requirements. According to the provided information, making a false declaration regarding CPD hours is a serious offense. The IA’s disciplinary framework, as outlined, mandates a starting point of a 12-month revocation of registration for such an infraction. This is a more severe penalty than simply failing to meet the hours, reflecting the gravity of misrepresenting compliance. Upon re-registration, the RP would still be required to complete any outstanding CPD hours, but the primary consequence is the extended period of registration suspension.

The question tests the understanding of how insurers internally classify their business operations. While regulatory classifications exist (like Classes 8-17), insurers often adopt practical classifications for management. The ‘Source of Business’ approach categorizes business based on how it was acquired, such as through agents, brokers, or directly from the public. This is distinct from classifying by the type of client (individuals vs. firms) or by the traditional UK/US departmental styles which focus on the type of insurance product.

The question tests the understanding of how salvage value affects the indemnity provided by an insurance policy. When damaged property has a residual value after a loss, this value is factored into the calculation of the payout. The insurer can either deduct the salvage value from the claim amount, allowing the insured to retain the damaged property, or the insurer can take possession of the salvage and pay the full claim. In this scenario, the insurer chose the latter, meaning they paid the full repair cost and then benefited from selling the salvaged vehicle. Therefore, the $5,000 received from selling the salvaged car reduces the net cost of the loss to the insurer.

The Insurance Claims Complaints Bureau (ICCB) is designed to handle complaints from individual policyholders regarding personal insurance claims. The Panel, appointed by the ICCB, has the authority to make awards against insurers. A key aspect of the Panel’s power is that an insurer against whom an award is made has no right to appeal this decision. However, the complainant, if dissatisfied with the award, retains the option to pursue legal recourse.

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 such actions.

The scenario describes a situation where an agent (the neighbour) acts on behalf of a principal (the ill person) without express authority. The neighbour pays the renewal premium for the household insurance to prevent it from lapsing, which is a situation of imminent jeopardy for the principal’s property interests. In such urgent circumstances, where communication with the principal is impossible, the law recognizes an ‘authority of necessity’. This grants the agent the power to bind the principal to contracts (like the insurance renewal) and entitles the agent to reimbursement and indemnity for expenses incurred. Therefore, the neighbour is likely considered an agent of necessity, and the principal would be bound by the renewal and obligated to reimburse the neighbour.

This question tests the understanding of voidable contracts within the context of insurance. A voidable contract is one that can be nullified by one of the parties due to a defect present at the time of its formation. In insurance, this often arises from misrepresentation or non-disclosure at the proposal stage. The key characteristic is that the contract remains valid until the aggrieved party chooses to void it. Option (a) accurately describes this situation where a policyholder discovers they provided inaccurate information during the application process and can choose to treat the contract as void. Option (b) describes an unenforceable contract, which is valid but cannot be enforced due to a procedural defect, not a fundamental flaw at inception. Option (c) describes a valid contract, which is enforceable by both parties. Option (d) describes a void contract, which is invalid from the outset and has no legal effect.

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 scenarios or incorrect figures. HK$20 million is for carrying on both General and Long Term business, HK$10 million is the minimum for General Business (unless carrying on statutory insurance business), and HK$5 million is not a specified minimum capital requirement in the provided text.

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 indemnity (not a benefit), cover the same interest affected, cover the same peril causing the loss, cover the same subject matter of insurance, and each policy must be liable for the loss (i.e., not subject to an exclusion that prevents contribution). In the scenario provided, while both policies cover the same property and the same peril (fire), they cover different interests: the merchant’s interest as owner and the warehouse operator’s interest as a bailee. Since the policies do not cover the same interest, contribution between the insurers will not apply. Therefore, each insurer is liable to pay the full amount of the loss covered by their respective policies, up to their policy limits, without contributing to each other.

The Insurance Authority (IA) mandates specific criteria for individuals and bodies seeking to operate as insurance brokers in Hong Kong. To be authorized, an individual or a body must either obtain direct authorization from the IA or become a member of an IA-approved body of insurance brokers. This ensures a regulated framework for the insurance broking industry, promoting professionalism and adherence to standards. The IA sets minimum requirements concerning qualifications, experience, financial stability, and professional conduct, which are crucial for maintaining market integrity and protecting policyholders.

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 because of policy terms (e.g., a deductible or a limit on coverage), and the insured recovers an amount from a third party that covers the entire loss, the insurer is entitled to a proportionate share of that recovery. This proportionate share is based on the ratio of the insurer’s payment to the total loss. The insured retains any recovery exceeding the total loss, and if the recovery is less than the total loss but more than the insurer’s payment, the insured would receive the remainder after the insurer is made whole. In this scenario, the insurer paid HK$50,000 of a HK$100,000 loss. The third party’s recovery is HK$80,000. The insurer’s subrogation right is limited to the amount it paid (HK$50,000). Since the recovery (HK$80,000) is sufficient to cover the insurer’s payment, the insurer is entitled to HK$50,000. The remaining HK$30,000 (HK$80,000 – HK$50,000) belongs to the insured, as it covers the portion of the loss not indemnified by the insurer (HK$100,000 – HK$50,000 = HK$50,000). Therefore, the insurer would receive HK$50,000.

This question tests the understanding of ‘Non-fraudulent Non-Disclosure’ as a breach of utmost good faith. It arises when a party, without intent to deceive, fails to reveal material facts. The scenario describes an applicant for travel insurance who omits mentioning a pre-existing medical condition that is not life-threatening but could affect the insurer’s assessment of risk. This omission, even if unintentional, constitutes a failure to disclose a material fact, which is a breach of the duty of utmost good faith. Option B is incorrect because while the omission was not fraudulent, it still breaches the duty of utmost good faith. Option C is incorrect because the duty of utmost good faith requires disclosure of material facts, not just those that are life-threatening. Option D is incorrect because the absence of a direct question about the specific condition does not absolve the applicant of the duty to disclose material facts under the principle of utmost good faith.

The scenario highlights a situation where a Hong Kong-incorporated financial institution (FI) has an overseas subsidiary 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, 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 relevant ordinance because local laws prevent it, the FI has two primary obligations. First, it must inform its relevant authority (RA) about this non-compliance. Second, and crucially, it must implement additional measures to effectively mitigate the Anti-Money Laundering and Counter-Terrorist Financing (AML/CFT) risks that arise from this inability to adhere to the stipulated Hong Kong standards. This ensures that even with local legal constraints, the FI actively manages the heightened risks.

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 text, a captive insurer has a minimum paid-up capital requirement of HK$2 million. The other options represent different scenarios or incorrect figures. HK$20 million is for carrying on both General and Long Term business, HK$10 million is the minimum for General Business (unless carrying on statutory insurance business), and HK$5 million is not a specified minimum capital requirement in the provided text.

This question tests the understanding of reinsurance from the perspective of an insurer. Outward reinsurance is when an insurer transfers some of its risk to another insurer or reinsurer. This is a fundamental risk management technique for insurance companies to manage their exposure and capacity. Inward reinsurance, conversely, is when an insurer accepts risk from another insurer, acting as a reinsurer itself. Therefore, an insurer seeking to reduce its own risk burden would engage in outward reinsurance.

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.

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.

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 contrast, an insurance agent’s primary responsibility is to the insurer, and their duty of care to the policyholder is generally lower unless they profess specialized skills. The Personal Data (Privacy) Ordinance governs the handling of personal data, but it does not directly dictate the professional liability of insurance intermediaries in the same way as common law principles of negligence. Therefore, the most direct consequence of an insurance broker’s failure to act with reasonable care, given their expert status, is professional negligence.

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 general compliance with anti-money laundering guidelines. Therefore, while adhering to the IA’s Guideline on AML/CFT is crucial for overall compliance and risk mitigation, it does not directly confer a statutory defence against the specific offences outlined in UNATMO concerning the provision or collection of property for terrorist purposes. The defence is tied to the act of reporting suspicious activities to the JFIU.

The scenario describes a situation where a customer is seeking clarification on their existing motor insurance 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 requests for duplicate policies and amendments to existing policies. While public relations and marketing are also mentioned in the broader context of customer interaction and company image, the direct handling of documentation requests falls under the purview of customer servicing. Sales enhancement programs are related to increasing sales, not directly to administrative policy requests.

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 designed to ensure data accuracy and transparency. Options B, C, and D describe actions related to data processing or security, but not the specific right of a data subject to view and amend their own information.

The question tests the understanding of the concept of ‘Agency by Estoppel’ within contract law as it applies to insurance. Agency by Estoppel arises when a principal, through their words or actions, leads a third party to believe that another person is their agent. If the third party acts on this belief, the principal is then prevented (estopped) from denying the existence of the agency relationship. This is distinct from apparent authority, where the agent is genuinely appointed but appears to have broader powers than actually granted. In the scenario, Mr. Chan’s consistent behaviour of allowing Ms. Lee to present herself as his representative, coupled with his failure to correct this misrepresentation, creates the conditions for agency by estoppel. Therefore, he would be bound by her actions towards a third party who reasonably relied on this representation.

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 an individual is an appointed insurance agent for Insurer X, they cannot also be an authorised insurance broker, even if they are dealing with different clients or different types of insurance.

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 the specific information that must be disclosed to the data subject before their data can be used or provided for direct marketing purposes, as stipulated by the PDPO.