IIQE Paper 1 Principles and Practice of Insurance Examination Quiz 62

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 current expiry. This ensures that the registered person has sufficient time to complete any required Continuing Professional Development (CPD) and to meet the ‘fit and proper’ criteria before the existing registration lapses, maintaining compliance with regulatory requirements.

The scenario describes a situation where a registered person is advising a potential policyholder. According to the regulations, a registered person must ensure they are competent to provide advice or seek assistance from their Principal or appointing Insurance Agent when necessary. This directly aligns with the principle of providing advice only within one’s expertise or seeking support when needed to ensure accurate and appropriate recommendations.

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 can occur even if the property is not ultimately used for such purposes. Option (b) describes making property or services available to a known or suspected terrorist or associate, which is also a form of terrorist financing. Option (c) focuses on the collection or solicitation of funds for such individuals. However, the core definition of terrorist financing encompasses the intent and use of property for terrorist acts, making option (a) the most comprehensive and direct definition.

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 provision allows them to address non-compliance by those responsible for overseeing or acting as registered persons.

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 insurers to manage their exposure and capacity. Inwards reinsurance, conversely, is when an insurer accepts risk from other insurers, acting as a reinsurer itself. The scenario describes an insurer seeking to reduce its exposure to a large portfolio of property risks, which directly aligns with the definition of outward reinsurance.

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 such cases, the client has the right to seek compensation from the broker. To mitigate the financial risks associated with such claims, insurance brokers are mandated to maintain Professional Indemnity Insurance. An insurance agent, on the other hand, primarily represents the insurer and generally has a lower expected level of expertise towards the policyholder, thus not being statutorily required to carry this specific insurance.

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.

The scenario describes an insurance practitioner moving to a new company and taking copies of their former employer’s customer information. This action directly violates the principle of lawful and fair means of data collection and the concept of purpose limitation. The data was collected by the former employer for specific purposes related to their business. Using this data for marketing the new employer’s products constitutes a change in the purpose of use, which is generally not permitted without consent, and obtaining the data in this manner is not considered fair or lawful. The Personal Data (Privacy) Ordinance, particularly Data Protection Principle 1, emphasizes that personal data should be collected by lawful and fair means and for a purpose directly related to the data user’s functions or activities. Taking copies of customer lists from a previous employer to solicit business for a new employer is a breach of these principles.

This question tests the understanding of how proximate cause operates when multiple perils are involved in a loss, specifically focusing on the relationship between insured and uninsured perils in a chain of events. According to the principles of proximate cause, if an uninsured peril leads to an insured peril, and the insured peril then causes the loss, the loss is generally recoverable. In this scenario, the master’s negligence (an uninsured peril) directly caused the collision, which in turn caused the fire (an insured peril). The fire then led to the explosion and subsequent water damage. The key is that the chain of events, initiated by an uninsured peril, ultimately resulted in a loss proximately caused by an insured peril (fire). Therefore, the cargo damage due to seawater, stemming from the fire, is recoverable under the policy that covers fire, even though the initial cause was negligence.

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 common knowledge and facts already known to the insurer are exceptions, a fact that reduces the risk, such as the presence of a sprinkler system, is still considered relevant to the insurer’s assessment of the risk and premium calculation, even if it lowers the risk. Therefore, failing to disclose such a fact, even if it benefits the insurer by potentially leading to a lower premium, constitutes a breach of the duty of utmost good faith because it prevents the insurer from having all the information a prudent insurer would consider.

The scenario describes an insurance agent handling sensitive customer data outside the traditional office environment. The core principle here is the protection of personal data. The guidance note emphasizes that agents must ensure data is not seen by unauthorized individuals and conversations are not overheard. This directly relates to the agent’s responsibility to safeguard customer information, aligning with the principles of data privacy and responsible conduct expected of insurance representatives, especially when dealing with personal data in public or semi-public settings. Option (b) is incorrect because while customer consent is important, the primary concern in this scenario is the physical and auditory security of the data itself. Option (c) is incorrect as the scenario doesn’t involve any specific underwriting decisions or risk assessment that would necessitate actuarial data. Option (d) is incorrect because the question is about data protection during customer interactions, not about the institution’s internal policies on staff training, although the institution should provide such policies.

The principle of utmost good faith in insurance mandates that both parties, particularly the proposer, must disclose all material facts that could influence a prudent insurer’s decision regarding acceptance of the risk or the premium amount. A material fact is defined as any circumstance that would influence a prudent insurer’s judgment. While the proposer must disclose facts that increase risk or affect premium calculation, they are not obligated to disclose facts that diminish the risk, such as the presence of an automatic sprinkler system, as this would likely lead to a lower premium and does not negatively impact the insurer’s decision-making in a way that requires disclosure under this principle. The Law Amendment and Reform (Consolidation) Ordinance relates to statutory assignments, not the disclosure of information during the proposal stage.

Renewal of an insurance contract is legally considered the creation of a new agreement, rather than a simple continuation of the old one. This means that the terms and conditions of the policy can be re-evaluated and potentially altered by the insurer at the time of renewal, subject to regulatory requirements and the terms of the original contract. Options B, C, and D describe different concepts within insurance: ‘Replacement’ refers to substituting a damaged item, ‘Risk Transfer’ is about shifting the financial burden of a risk, and ‘Salvage’ relates to recovering value from damaged property.

The scenario describes an insurance practitioner moving to a new company and taking copies of their former employer’s customer policy information. This action directly violates the principle of lawful and fair means of data collection and the prohibition against changing the purpose of data use. Specifically, using data collected for one purpose (servicing existing policies with the former employer) for a new purpose (marketing for the new employer) without consent is a breach. The Personal Data (Privacy) Ordinance (PDPO) emphasizes that personal data should only be used for the purpose for which it was collected, unless consent is obtained or another lawful basis exists. Taking copies of customer data for personal use and then using it for a new employer’s marketing efforts is a clear misuse of data and a breach of the original collection purpose.

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 in the insurance market. 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 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 item. 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 may be higher than the market value at the time of the loss, again exceeding strict indemnity. Reinstatement insurance allows the insured to replace the lost or damaged item with a new one of similar kind and quality, which can also result in 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 the loss. If the property is underinsured, the payout will be less than the loss, and it is designed to prevent over-indemnity, not to cause it. Therefore, ‘New for Old’ cover, Agreed value policies, and Reinstatement insurances are the provisions that can lead to more than indemnity being payable.

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 (a) directly addresses this responsibility by highlighting the need to prevent unauthorized access to customer information. 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 irrelevant as the scenario doesn’t involve any potential for money laundering. Option (d) is also incorrect because while maintaining professional conduct is crucial, the primary concern in this specific situation is data privacy and security, not general ethical behavior.

This question assesses the understanding of the role of an accountant within an insurance company, specifically focusing on the critical function of managing company assets. While record-keeping, collections, and payments are all vital accounting functions, the prompt highlights the accountant’s responsibility for the care and placement of company assets, particularly when there isn’t a dedicated investment department. This responsibility is paramount for ensuring the insurer’s financial stability through security, yield, and liquidity, directly impacting its ability to meet financial obligations.

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.

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 regular audits, even without a formal contract, can be considered an ‘other means’ of ensuring compliance with data protection requirements for personal data handled by a processor.

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.

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 this equipment is damaged or destroyed, the business owner will suffer a direct financial loss due to business interruption and the cost of replacement. Therefore, they possess a legally recognized financial relationship with the equipment, satisfying the criteria for insurable interest.

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 question tests the understanding of the minimum paid-up capital requirements for authorized insurers in Hong Kong, as stipulated by the Insurance Companies Ordinance. Specifically, it focuses on the scenario where an insurer carries on both General and Long Term business. According to the provided text, the minimum paid-up capital requirement for an insurer carrying on both General and Long Term business is HK$20 million. The other options represent different capital requirements for different types of insurers or business lines: HK$10 million is the minimum for General Business if not carrying on statutory insurance business, HK$2 million is the minimum for Long Term Business or Captive Insurers, and HK$5 million is not a specified minimum capital requirement in the provided context.

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 represent periods that are either too early or too late, potentially leading to lapses in registration or unnecessary administrative burdens.

The Code of Practice for the Administration of Insurance Agents defines an ‘Insurance Agent’ broadly to encompass individuals and agencies acting on behalf of insurers. Crucially, it explicitly excludes Responsible Officers and Technical Representatives from this definition, as they are considered distinct roles within the agency structure, even though they are registered persons. Therefore, a person who solely acts as a Technical Representative for an insurance agency is not classified as an ‘Insurance Agent’ under the Code’s primary definition.

This question tests the understanding of an insurance intermediary’s role in preventing corruption and fraud, specifically in relation to the ICAC’s services and the ‘Practical Guide on Professional Ethics for Life Insurance Intermediaries’. The ICAC provides resources like Best Practice Packages and confidential advice to organizations to prevent corruption. For insurance intermediaries, the ICAC offers training and has collaborated on a guide to enhance vigilance against corruption and strengthen ethical conduct management. Therefore, intermediaries are encouraged to familiarize themselves with these resources and the relevant Ordinance to prevent corrupt practices.

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. Inward 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.

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.

This question tests the understanding of apparent authority in agency law, specifically how a principal’s past conduct can create an impression of authority in an agent towards a third party, even if the agent’s actual instructions were to the contrary. The scenario describes an insurance agent who, despite being prohibited from accepting certain types of risks, has repeatedly done so with the principal’s subsequent issuance of policies. This consistent pattern of behaviour by the principal, in honouring the agent’s unauthorized actions, leads the third party (the client) to reasonably believe that the agent possesses the authority to accept such risks. This belief, fostered by the principal’s actions, establishes apparent authority, making the principal liable for the agent’s future similar actions, even if they exceed the agent’s actual instructions. Option B is incorrect because actual authority refers to the authority expressly or impliedly granted by the principal to the agent, which is not the basis for the principal’s liability in this case. Option C is incorrect as ratification is a retrospective approval of an act already done without authority, whereas apparent authority operates prospectively based on the principal’s representations. Option D is incorrect because ostensible authority is synonymous with apparent authority, but the explanation focuses on the mechanism of how it arises through the principal’s conduct, making the concept of apparent authority the more direct answer to the underlying principle being tested.