IIQE Paper 1 Principles and Practice of Insurance Examination Quiz 63

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 question tests the understanding of how insurers might internally classify their business operations. While regulatory classifications exist (like Classes 8-17), insurers have flexibility in their internal structures. The ‘Source of Business’ classification categorizes business based on how it was acquired, such as through agents, brokers, or directly from the public. This is a distinct approach from classifying by the type of risk covered or the nature of the insured party.

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 the specific intervention power described as a limitation on premium income. Restrictions on investments and new business are distinct powers, and the custody of assets by a trustee is a measure for additional security, not a direct limitation on premium income.

Guidance Note 4 (GN4) issued by the IARB (now part of the HKFI) provides specific directives to ensure ethical conduct and customer protection in insurance sales. One of its key stipulations is that insurance agents must not allow customers to sign blank or incomplete forms. Any modifications to a document after the customer has signed must be initialled by the customer to validate the changes and prevent potential fraud or misrepresentation. This practice safeguards the policyholder by ensuring they are aware of and consent to all details on the forms they sign.

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 for discretion and secure handling of documents containing personal data. Option (b) is incorrect because while customer consent is important for data processing, it doesn’t directly address the physical security of documents in a public setting. Option (c) is incorrect as the focus is on preventing unauthorized access to data, not on the general marketing of insurance products. Option (d) is incorrect because while record-keeping is a general requirement, the specific concern in this scenario is the immediate risk of data exposure in a public space.

The scenario describes a Registered Person (RP) who has failed to provide requested documentation to the Insurance Authority (IA) regarding their Continuing Professional Development (CPD) compliance. According to the provided text, if an RP fails to respond to a request from the IA to produce proof of compliance with CPD requirements, their registration should be revoked for a period determined by the IA. Furthermore, their future registration applications will not be processed until proof of compliance is provided. This directly aligns with the consequence of non-compliance outlined in the regulations.

The Insurance Claims Complaints Bureau (ICCB) is a key external dispute resolution body for policyholders dissatisfied with an insurer’s final response. The ICCB’s panel has the authority to make awards against insurers. While the complainant can seek further legal action if unsatisfied with an ICCB award, the insurer does not have the right to appeal an award made against them. This lack of appeal right for the insurer is a crucial aspect of the ICCB’s function to provide a definitive resolution for the policyholder.

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 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 its inception. This principle ensures that the legal system does not lend its authority to agreements that undermine societal order or statutory provisions. Therefore, a contract to sell counterfeit goods, which is an illegal activity, would be void due to illegality.

The Insurance Companies Ordinance (Cap. 41) mandates that insurance brokers maintain records that adequately explain all transactions, accurately reflect their financial standing, and facilitate the preparation of financial statements that present a true and fair view. These records must also be suitable for auditing. Specifically, they need to detail all dealings with insurers, clients, and the broker themselves, as well as all income and expenses, and the broker’s assets and liabilities. The requirement to retain these records for a minimum of seven years is a crucial aspect of regulatory compliance, ensuring accountability and the ability to investigate past activities if necessary. Therefore, the primary purpose of these record-keeping requirements is to ensure transparency, financial integrity, and auditability of the broker’s operations.

The question tests the understanding of ‘reinstatement’ in insurance, specifically how it relates to restoring the insured property to its pre-loss condition. Option (a) accurately defines reinstatement as the restoration of the insured property to its condition immediately before the damage occurred. Option (b) describes ‘salvage,’ which refers to the remains of damaged property that still have value. Option (c) describes ‘average,’ a principle that reduces the payout proportionally if the property is underinsured. Option (d) describes ‘abandonment,’ a concept primarily used in marine insurance where the insured surrenders the insured property to the insurer for a total loss payment.

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 consequences such as the revocation of registration for a specified period, with additional penalties for false declarations or failure to provide proof of compliance. The question tests the understanding of the annual CPD hour requirement for specific intermediaries in the travel insurance sector.

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 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 these distinct but related actuarial review requirements for different classes of insurance business as stipulated by the IA’s guidelines and the Insurance Ordinance.

The Insurance Claims Complaints Bureau (ICCB) is a self-regulatory body established by the insurance industry in Hong Kong to handle complaints from individual policyholders concerning personal insurance claims. Its primary objective is to provide an accessible and impartial mechanism for resolving disputes between policyholders and insurers. The ICCB’s panel, which handles these complaints, has the authority to make awards against insurers up to a specified monetary limit. The Insurance Authority (IA) is the statutory regulator of the insurance industry in Hong Kong, responsible for licensing, supervision, and enforcement. While the IA oversees the overall conduct of insurers and can investigate complaints, it is not the primary body for adjudicating individual claims disputes in the same manner as the ICCB. The Insurance Agents Registration Board (IARB) is responsible for the registration and regulation of insurance agents, focusing on their conduct and professional standards, not directly on resolving claims disputes between policyholders and insurers.

The core of underwriting in general insurance, unlike life insurance, is its dynamic nature. Because general insurance policies are typically 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 commitment is long-term and changes require policyholder consent. Therefore, the ability to review and adjust terms at renewal is a key characteristic that differentiates general insurance underwriting.

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 the specific intervention power described in this context. Restrictions on investments and new business are distinct powers, and the custody of assets by a trustee is a measure for additional security, not a direct limitation on premium income.

The Insurance Companies Ordinance (Cap. 41) mandates that insurance brokers maintain records that adequately explain all transactions, accurately reflect their financial standing, and facilitate the preparation of financial statements that present a true and fair view. These records must also be suitable for auditing. Specifically, brokers must keep detailed records of all transactions involving insurers, clients, and themselves, as well as all income and expenses, and their assets and liabilities. These records are required to be retained for a minimum of seven years. Therefore, the primary purpose of these record-keeping requirements is to ensure transparency, accountability, and the ability to verify the broker’s financial health and operational integrity.

A contract is fundamentally a legally binding agreement. While many agreements exist in daily life, not all are intended to have legal consequences. Social arrangements, like a lunch appointment, are generally not considered contracts because the parties do not intend to create legal obligations. The core of a contract lies in promises exchanged between parties, where a breach of these promises can lead to legal recourse. An insurance policy itself is not the contract but rather the written evidence of the contractual agreement between the insurer and the insured. Therefore, the most accurate and encompassing definition of a contract is a legally enforceable agreement.

The Conduct of Insurance Agents for General Insurance Business and Restricted Scope Travel Business mandates specific professional behaviours. Agents are required to identify themselves before engaging in business discussions to ensure transparency and allow clients to know who they are dealing with. Furthermore, they must provide advice only when they possess the necessary knowledge and competence in the relevant product or area. Explaining policy differences when making comparisons is crucial for informed decision-making, and ensuring the client understands the policy cover they are purchasing is a fundamental duty to prevent misrepresentation and ensure client satisfaction. Therefore, all four listed points are essential components of the conduct expected of insurance agents.

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 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 encompass non-contractual oversight and auditing mechanisms. Therefore, implementing robust internal policies and conducting regular audits, even without a formal contract, can be considered ‘other means’ to ensure compliance with data protection requirements.

This question tests the understanding of ‘Apparent Authority’ in agency law, a key concept in insurance. Apparent authority arises when a principal’s actions lead a third party to reasonably believe that an agent has the authority to act, even if that authority wasn’t explicitly granted. This is distinct from agency by estoppel, which applies when a principal allows someone to appear as an agent without any authority at all. In the scenario, the insurer’s consistent allowance of the agent to solicit business and handle policy renewals creates a manifestation of authority to the public, making the insurer liable for the agent’s actions within that perceived scope, even if the agent exceeded their actual instructions regarding a specific policy term.

The scenario describes an insurance agent handling sensitive customer information outside the traditional workplace. 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 for discretion and secure handling of documents and conversations. Option (b) is incorrect because while customer consent is important, it doesn’t negate the agent’s responsibility to actively protect the data from accidental disclosure. Option (c) is incorrect as the primary concern is preventing unauthorized access, not necessarily the volume of data handled. Option (d) is incorrect because while reporting breaches is crucial, the immediate priority in this situation is preventing the breach from occurring in the first place.

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.

The question tests the understanding of the minimum net asset requirements for different types of insurance brokers. 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. Therefore, the incorporated broker has a higher overall financial requirement.

The Insurance Ordinance in Hong Kong categorizes insurance business into Long Term Business and General Business. Long Term Business is further subdivided into nine classes, including Life and Annuity (Class A), Marriage and Birth (Class B), Linked Long Term (Class C), Permanent Health (Class D), Tontines (Class E), Capital Redemption (Class F), and three categories for Retirement Scheme Management (Classes G, H, and I). General Business is divided into seventeen classes, such as Accident, Sickness, Land Vehicles, Railway Rolling Stock, Aircraft, Ships, and Goods in Transit. Therefore, a policy that provides benefits payable upon the birth of a child falls under the statutory classification of ‘Marriage and Birth’ within the Long Term Business category.

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 insurance business and general insurance business. The scenario describes an insurance company that is licensed to underwrite both life insurance policies and property damage coverage. This dual licensing and operation directly aligns with the definition of a composite insurer. Option B is incorrect because an insurer dealing with only one type of business (either long-term or general) is not a composite insurer. Option C is incorrect as the term ‘composite’ refers to the types of business transacted, not the geographical reach or the number of policyholders. Option D is incorrect because while an insurer must be ‘fit and proper’ to operate, this is a regulatory standard, not the definition of a composite insurer.

The scenario highlights a situation where a customer is dissatisfied with a policy amendment process, which falls under the purview of customer servicing. While marketing and public relations are important for a company’s image, and sales enhancement programs aim to boost business, the core issue presented is a client’s negative experience with a service request. Therefore, addressing this complaint effectively and efficiently is a primary responsibility of the customer servicing department, as outlined in the syllabus regarding handling client inquiries and issues.

Subrogation is a legal principle that allows an insurer, after paying a claim, to step into the shoes of the insured and pursue any rights the insured may have against a third party responsible for the loss. This prevents the insured from recovering twice for the same loss and ensures that the responsible party bears the cost. The insurer’s right to subrogation is limited to the amount they have paid out as indemnity. Therefore, if the insurer paid HK$50,000 for a loss, they can only recover up to HK$50,000 from the third party, even if the total loss was greater.