IIQE Paper 1 Principles and Practice of Insurance Examination Quiz 64

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.

This question tests the understanding of an insurance intermediary’s role in preventing corruption and fraud, specifically concerning their interaction with clients and third parties. The provided text emphasizes that intermediaries should guard against violating the Ordinance when dealing with clients or other third parties and report corruption cases to the ICAC. Therefore, proactively identifying and reporting suspicious activities, even if they don’t directly involve the intermediary, is a crucial aspect of their ethical and legal obligations. Option B is incorrect because while intermediaries should be aware of the Ordinance, simply being aware doesn’t fulfill the proactive reporting duty. Option C is incorrect as the focus is on preventing corruption and fraud, not solely on client acquisition. Option D is incorrect because while understanding the Ordinance is important, the primary action required in suspicious situations is reporting, not just internal investigation without external notification.

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 faces potential financial harm due to a natural disaster, 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 loss.

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 that a data user can implement to monitor a data processor’s adherence to data protection requirements. Therefore, implementing a robust internal auditing framework for data processors falls under these ‘other means’ of ensuring compliance, even in the absence of a specific contractual clause.

The Insurance Authority (IA) mandates that individuals or entities wishing to operate as insurance brokers in Hong Kong must either secure direct authorization from the IA or become a member of an IA-approved body of insurance brokers. This dual pathway ensures that all insurance intermediaries adhere to regulatory standards, safeguarding consumer interests. The IA’s approval process for both direct authorization and for bodies of brokers involves rigorous assessment of qualifications, experience, financial stability, and adherence to ethical conduct and operational requirements, as outlined in the relevant sections of the Insurance Ordinance and associated guidelines.

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.

Guidance Note 4 (GN4) issued by the IARB (now part of HKFI) provides specific directives on agent conduct to uphold integrity and protect policyholders. A key requirement is that insurance agents must not accept blank or incomplete proposal forms from clients. Any necessary amendments to a form must be initialed by the customer to ensure transparency and prevent unauthorized alterations. This measure is crucial for safeguarding against misrepresentation and potential fraud, thereby maintaining trust in the insurance sales process.

Terrorist financing, as defined by relevant legislation and international standards, involves the provision or collection of property with the intention or knowledge that it will be used to commit terrorist acts. This includes not only direct funding but also making property or services available to individuals known or suspected to be terrorists or terrorist associates. Option (a) accurately captures this broad definition by encompassing the intent or knowledge of the property’s use in terrorist acts. Option (b) is partially correct as it addresses making property available to known terrorists, but it omits the crucial element of intent for use in terrorist acts. Option (c) focuses solely on the collection or solicitation for the benefit of a terrorist or associate, which is a component but not the complete definition of terrorist financing. Option (d) describes the placement stage of money laundering, which is a separate concept from terrorist financing itself, although the two can be linked.

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. While the Insurance Claims Complaints Bureau and Panel deal with claims-related disputes for personal policyholders, and the Insurance Ordinance provides the overarching legal framework for the industry, neither is directly responsible for the initial registration and ongoing conduct oversight of individual insurance agents.

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.

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 manifestation of profit sharing in participating policies.

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. Even without a direct link to a designated terrorist, the FI has a legal obligation under the UNATMO to report suspicious transactions to the Joint Financial Intelligence Unit (JFIU). This reporting is crucial for preventing the flow of funds that could be used for terrorist activities, aligning with the broader CTF framework. Option B is incorrect because while reporting is mandatory, the primary action is reporting the suspicion, not necessarily freezing the funds unilaterally, which is the Secretary for Security’s role. Option C is incorrect as the UNATMO’s penalties are for contraventions of its provisions, not for failing to identify a terrorist associate directly, although such failure could lead to contravention. Option D is incorrect because while due diligence is a continuous process, the immediate and most critical action upon suspecting terrorist financing is to report it to the JFIU.

The question tests the understanding of the minimum net asset requirements for an incorporated insurance broker. According to the regulations, an incorporated insurance broker must maintain a minimum net asset value of HK$100,000 and a minimum paid-up share capital of HK$100,000 at all times. Option A correctly states these requirements. Option B is incorrect because it only mentions net assets and not paid-up share capital. Option C is incorrect as it suggests a lower threshold for paid-up share capital and a higher threshold for net assets. Option D is incorrect because it mixes the requirements for unincorporated brokers with those for incorporated ones and suggests a higher net asset requirement.

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. Specifically, it focuses on the implications of a group of companies for an insurance intermediary. According to the provided text, for the purposes of clause 2.2(b) of the Code of Practice, a ‘Group of Companies’ refers to a relationship where companies are subsidiaries of a holding company or are subsidiaries of each other. This definition is crucial for determining if an intermediary operating within such a structure meets the fitness and properness requirements, as regulatory oversight often extends to the entire group. Therefore, understanding the definition of a ‘Group of Companies’ in this context is essential for compliance.

The question tests the understanding of policy provisions that can lead to a payout exceeding the actual loss incurred (i.e., more than indemnity). ‘New for Old’ cover means that if an item is damaged or destroyed, it is replaced with a new item, regardless of the age or depreciation of the original. This often results in a payout greater than the depreciated value of the lost item, thus exceeding pure indemnity. Agreed value policies fix the value of the insured item at the outset of the policy. If the item is a total loss, the insurer pays the agreed value, which might be higher than the market value at the time of loss, again exceeding strict indemnity. Reinstatement insurances allow the insured to repair or replace the lost or damaged property to its condition immediately before the loss. This can also result in a payout exceeding the depreciated value, as the replacement will be new. The condition of average, conversely, is a condition that limits the payout to the proportion that the sum insured bears to the actual value of the property at the time of loss. If the sum insured is less than the value, the payout is reduced, preventing over-indemnity. Therefore, ‘New for Old’ cover, agreed value policies, and reinstatement insurances are the provisions that can lead to more than indemnity being payable.

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 customers or other individuals about suspicious activity investigations. This involves training staff to recognize unusual transactions based on customer knowledge and to conduct customer due diligence (CDD) in a manner that avoids such disclosures. The emphasis is on proactive measures and staff awareness to maintain the integrity of anti-money laundering (AML) and counter-terrorist financing (CFT) efforts, as mandated by relevant guidelines and regulations.

The scenario describes an individual acting as an insurance agent who also sells MPF schemes. According to the provided text, an insurance agent engaging in selling or advising on MPF schemes must also be registered as an MPF intermediary with the MPFA. This ensures compliance with regulations governing both insurance and mandatory provident fund products, safeguarding consumer interests and maintaining market integrity. The other options are incorrect because they do not address the specific requirement for MPF intermediary registration when an insurance agent also deals with MPF products.

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 adherence to standards and can escalate actions when compliance is not met.

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, as mandated by relevant privacy regulations. Agents must take proactive measures to prevent unauthorized access or disclosure. This includes ensuring conversations are not overheard and documents containing personal data are not visible to third parties. The institution’s responsibility is to provide clear guidelines and training to its staff on these data protection protocols when working remotely or in public spaces.

The question tests the understanding of the role of approved bodies of insurance brokers as defined by Hong Kong regulations. Section 70 of the Insurance Ordinance empowers the Insurance Authority to approve associations of insurance brokers. These approved bodies, such as the Hong Kong Confederation of Insurance Brokers and the Professional Insurance Brokers Association Limited, play a crucial role in self-regulation and upholding professional standards within the brokerage sector. The other options describe different aspects of insurance operations or regulatory bodies not directly related to the specific function of approved broker associations under Section 70.

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. While the Insurance Claims Complaints Bureau and Panel deal with claims-related disputes for personal policyholders, and the Insurance Ordinance provides the overarching legal framework for the industry, neither is directly responsible for the initial registration and ongoing conduct oversight of individual insurance agents.

The question tests the understanding of policy provisions that can lead to a payout exceeding the actual loss incurred (i.e., more than indemnity). ‘New for Old’ cover means that if an item is damaged or destroyed, it is replaced with a new item, regardless of the age or depreciation of the original. This often results in a payout greater than the depreciated value of the lost item, thus exceeding pure indemnity. Agreed value policies fix the value of the insured item at the commencement of the policy. If the item is lost or destroyed, the insurer pays the agreed value, which might be higher than the market value at the time of loss. Reinstatement insurance allows the insured to repair or replace the lost or damaged property to a condition substantially the same as it was before the loss, without deduction for depreciation. This can also lead to a payout exceeding the depreciated value. The condition of average, conversely, is a condition that limits the payout to the proportion that the sum insured bears to the actual value of the property at the time of loss. If the property is underinsured, the payout will be less than the loss, and certainly not more than indemnity. Therefore, ‘New for Old’ cover, Agreed value policies, and Reinstatement insurances are the provisions that can result in more than indemnity being payable.

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 adherence to standards and can escalate actions when compliance is not met.

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 scenario describes a situation where an insurer has failed to update a customer’s address, leading to returned mail. This directly relates to the accuracy of personal data and the data subject’s right to have it corrected. Option A is incorrect because while data users must ensure data is accurate (Principle 2), the primary right being exercised by the customer in this scenario is access and correction. Option C is incorrect as Principle 4 deals with data security, not the right to access or correct information. Option D is incorrect because Principle 5 concerns transparency about data policies, not the individual’s right to view or amend their own data.

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 ability to limit an insurer’s premium income. This measure is typically employed when the regulator believes the insurer is expanding too rapidly, potentially leading to difficulties in managing the liabilities associated with new business. Other intervention powers include restricting investments, limiting new business capacity, appointing a trustee for assets, conducting special actuarial investigations, appointing a manager to take control, or initiating winding-up proceedings.

The question tests the understanding of the renewal period for an Officer/Technical Representative’s registration. According to the provided syllabus, the registration for an Officer/Technical Representative can be renewed not earlier than three months before its expiry. This ensures that the renewal process can be completed well in advance, maintaining compliance and continuity of service. Options B, C, and D suggest periods that are either too short or too long, potentially leading to lapses in registration or unnecessary administrative burden.

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.

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 Agents Registration Board (IARB) has specific requirements for processing applications. According to the provided text, the IARB is not obligated to review an application if it is not submitted in the prescribed format, is incomplete, or if requested information has not been fully provided. This emphasizes the importance of submitting a complete and accurate application from the outset. Options B, C, and D describe actions or requirements that are not the primary reason for the IARB to refuse to consider an application under these specific circumstances.

The scenario describes a situation where a customer is seeking clarification on their existing motor insurance policy, specifically requesting a duplicate policy document and potentially an amendment. According to the provided syllabus, the Customer Servicing department is responsible for handling such requests, which fall under the category of ‘Documentation’. This includes providing duplicate policies and processing amendments to existing policies. While public relations and handling complaints are also functions of customer service, the specific actions mentioned in the scenario directly align with the documentation duties.