IIQE Paper 1 Principles and Practice of Insurance Examination Quiz 65

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, as this would not influence the insurer’s decision in a way that disadvantages them. Therefore, failing to mention an automatic sprinkler system, which reduces risk and would likely lower the premium, does not constitute a breach of utmost good faith.

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 normal customer behavior and transaction patterns. When a suspicion arises, the FI must manage the Customer Due Diligence (CDD) process carefully to avoid any actions that could be construed as tipping off. The guideline emphasizes that individual insurance agents, while depositing their records with the insurer, remain responsible for ensuring the insurer’s systems comply with AMLO record-keeping requirements and that these records are readily accessible to regulatory authorities.

The United Nations (Anti-Terrorism Measures) Ordinance (UNATMO) empowers the Secretary for Security to freeze assets suspected of being linked to terrorism. It is an offense to deal with such frozen property without a license. The ordinance also prohibits making property or financial services available to terrorists or their associates, or collecting property for them, except under a license. Contravention of these provisions carries severe penalties, including imprisonment and fines. Financial Institutions (FIs) are obligated to implement robust screening systems to identify and report suspicious transactions and customers, including those designated by international bodies or overseas authorities. Maintaining an up-to-date database of designated individuals and entities is crucial for compliance. The question tests the understanding of the scope of the UNATMO regarding the prohibition of providing services to designated parties and the penalties associated with such actions.

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 for direct marketing purposes.

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 principle of insurable interest is fundamental to the validity of an insurance contract. It requires that the policyholder must have a legally recognized relationship with the subject matter of the insurance, such that they would suffer a financial loss if the insured event occurs. Without this connection, the contract is void. In this scenario, while the business owner has a financial interest in the success of their supplier’s operations, this is an indirect relationship. The direct financial loss would be incurred by the supplier if their factory is damaged. Therefore, the business owner does not possess the legally recognized relationship to the supplier’s factory that would grant them insurable interest in its protection.

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 by law), 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 scenario describes a situation where a person has a financial relationship with a property but no legal claim or direct financial loss if the property is damaged. Therefore, they lack the necessary insurable interest to insure it.

The Insurance Agents Registration Regulation (Cap. 31 sub. leg. A) mandates that an insurer must ensure that its appointed insurance agents are registered with the Insurance Authority. This registration is a prerequisite for legally conducting insurance business. While insurers have a responsibility to provide training and ensure compliance with codes of conduct, the fundamental legal requirement for an agent to be able to act is their registration. Therefore, an insurer’s primary obligation is to verify and maintain the registration status of its agents.

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 address non-compliance effectively.

This question tests the understanding of how an agency relationship can be established, specifically focusing on the concept of ratification. Ratification occurs when a principal retrospectively approves an act performed by an agent without prior authority. In the scenario, the agent exceeded their express authority by insuring a cargo risk for West Africa, which they were explicitly forbidden from doing. However, the principal subsequently issued policies for these risks. This action by the principal signifies their acceptance and validation of the agent’s unauthorized act, effectively granting retrospective authority and binding the principal to the contract. This aligns with the definition of ratification, where an act initially lacking authority becomes valid through subsequent approval. Option B is incorrect because apparent authority arises from the principal’s manifestations to third parties, not from the agent’s unauthorized actions being subsequently approved. Option C is incorrect as an agency by agreement requires mutual consent, which is not the primary mechanism at play here; the core issue is the post-act approval. Option D is incorrect because an agency by necessity arises in emergency situations to prevent loss, which is not described in this scenario.

The Insurance Agents Registration Regulation (Cap. 31 sub. leg. K) mandates that an insurer must ensure that its appointed insurance agents are registered with the Insurance Authority. This registration is a prerequisite for legally conducting insurance business. While insurers have a responsibility to ensure compliance with laws and codes of practice, and to provide training, the fundamental requirement for an agent to be legally authorized to act is their registration. Therefore, an insurer’s primary obligation regarding an agent’s ability to solicit business is to confirm their valid registration.

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 for 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 method of profit distribution for participating policies.

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.

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 an internal prohibition to the agent, creates the impression for the client that the agent possesses the authority to grant such cover. This reliance by the third party on the principal’s past conduct is the cornerstone of apparent authority, making the principal liable for the agent’s unauthorized act.

This question tests the understanding of how salvage value impacts the indemnity provided by an insurer. When damaged property has residual value, this value is factored into the calculation of the loss. The insurer can either deduct the salvage value from the payout, allowing the insured to retain the damaged item, or the insurer can take possession of the salvage and dispose of it, paying the full loss amount. The key principle is that the insured should not profit from a loss, and the salvage value represents a recovery that reduces the net loss incurred by the insurer.

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.

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 (innocently or negligently), fails to reveal material facts to the other party. In the scenario, the applicant’s failure to mention the previous claim, even if forgotten, constitutes a failure to disclose a material fact. This is not ordinary good faith, which only requires truthful answers to direct questions. It’s also not a policy condition, which outlines the terms of the policy, nor is it a peril, which is the cause of a loss. The key is the innocent or negligent omission of a material fact, which is the definition of non-fraudulent non-disclosure.

The question tests the understanding of the minimum net asset requirements for different types of insurance brokers in Hong Kong, as stipulated by relevant regulations. An unincorporated insurance broker is required to maintain a minimum net asset value of HK$100,000 at all times. An incorporated insurance broker has a dual requirement: a minimum net asset value of HK$100,000 and a minimum paid-up share capital of HK$100,000. The question specifically asks about an incorporated insurance broker, making the HK$100,000 paid-up share capital a crucial component of the correct answer.

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 definition encompasses situations where the property is actually used for terrorism and also where it is intended for such use, even if it is not ultimately deployed. Option (b) describes making property or services available to a known or recklessly considered terrorist or associate, which is a related but distinct offense. Option (c) focuses solely on the collection or solicitation of funds for a terrorist or associate, omitting the crucial element of intent or knowledge regarding the use of the property for terrorist acts. Therefore, the most comprehensive and accurate definition aligns with the provision or collection of property with the specific intent or knowledge of its use in committing terrorist acts.

This question tests the understanding of how proximate cause applies when multiple perils are involved, specifically when an uninsured peril leads to an insured peril. According to the principles of proximate cause, if an uninsured peril (like negligence) directly causes an insured peril (like fire), and the loss results from that insured peril, the loss is generally recoverable. In this scenario, the master’s negligence (uninsured peril) caused a collision, which in turn caused a fire (insured peril). The subsequent explosion and water damage, while triggered by the fire, are part of a chain of events originating from the insured peril. Therefore, the loss due to water damage, stemming from the fire, would be considered recoverable under the fire policy, as the fire is the proximate cause that initiated the chain of events leading to the loss, even though the initial cause was negligence.

A registered person selling long-term insurance must make reasonable efforts to ensure the policy aligns with the client’s disclosed needs and financial capacity. This includes understanding the client’s situation and recommending a suitable product, rather than pushing any available policy. The other options describe actions that are either not explicitly required or are potentially misleading. Offering a rebate not specified in the policy is prohibited, and while explaining differences is important, the primary duty is suitability.

The principle of insurable interest is fundamental to the validity of an insurance contract. It requires the policyholder to have a legally recognized financial stake in the subject matter of the insurance. This means that the policyholder must stand to 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 by law), 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 scenario describes a situation where a business owner is insuring a piece of equipment that is crucial for their operations. If the equipment is damaged or destroyed, the business owner will suffer a direct financial loss due to the inability to operate and generate revenue. Therefore, they possess a legally recognized financial relationship with the equipment, satisfying the criteria for insurable interest.

The scenario describes an insurance agent handling sensitive customer information outside the traditional office environment. 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 maintaining professionalism is important, it doesn’t directly 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 while compliance with regulations is a given, the specific action required in this situation is the active protection of data from being seen or overheard.

The Insurance Authority (IA) mandates that insurers undertaking employees’ compensation and motor insurance business must undergo an annual actuarial review of their reserves. This review is to be conducted according to specific criteria, with a formal report certified by an appointed actuary and submitted to the IA within a set timeframe. This requirement extends to both direct insurers and professional reinsurers. Long-term insurers have a similar, though distinct, obligation for a periodic actuarial investigation into their financial condition, typically every 12 months, with an abstract of the report and a certificate from the appointed actuary submitted to the IA. The question tests the understanding of which types of insurance business are subject to mandatory annual actuarial reviews as per the IA’s guidelines, and the distinction between these requirements and those for long-term business.

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, not the date of application or any other internal processing date.

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.

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 non-profit organizations that 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 question tests the understanding of the primary function of insurance as a risk transfer mechanism. While insurance does contribute to employment, financial services, and economic development, its core purpose is to shift the potential financial burden of a loss from an individual or entity to an insurer in exchange for a premium. The other options represent ancillary benefits or broader economic impacts, not the fundamental role of insurance itself.

This question tests the understanding of how salvage value impacts the indemnity provided by an insurer. When damaged property has residual value, this value is factored into the calculation of the loss. The insurer can either deduct the salvage value from the payout, allowing the insured to retain the damaged item, or the insurer can take possession of the salvage and dispose of it, paying the full loss amount. Both methods aim to prevent the insured from profiting from the loss and ensure the indemnity does not exceed the actual loss suffered.

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 potential conflicts of interest and ensure clarity in representation. The regulation aims to maintain distinct professional boundaries between agents, who represent insurers, and brokers, who represent clients. Therefore, an individual cannot act as both, regardless of whether they are dealing with the same or different clients.