IIQE Paper 1 Principles and Practice of Insurance Examination Quiz 61

This question tests the understanding of an insurance intermediary’s role in preventing corruption and fraud, specifically concerning their interaction with the Independent Commission Against Corruption (ICAC) and relevant guidelines. The ICAC provides resources like ‘Best Practice Packages’ and a ‘Practical Guide on Professional Ethics for Life Insurance Intermediaries’ to help the industry. Intermediaries are encouraged to familiarize themselves with these materials and report corruption cases. Therefore, actively engaging with these ICAC resources and adhering to their guidance is a key responsibility.

The principle of insurable interest, as outlined in insurance regulations, dictates that a policyholder must have a legitimate financial stake in the subject of the insurance. This means that a loss must be demonstrable and legally recognized if the insured event occurs. While a business partner might suffer a financial loss if a key individual dies, this relationship alone, without a direct financial dependence or legal obligation, does not automatically grant insurable interest in that individual’s life. The law requires a more direct connection, such as a spouse, child, or a creditor with a secured debt, to establish this interest. Therefore, a business partner’s potential loss from a colleague’s death, while real, is not typically considered a direct insurable interest in the colleague’s life under standard insurance principles.

The question tests the understanding of market concentration in Hong Kong’s insurance sector, specifically differentiating between General Business and Long Term Business. The provided text indicates that in General Business, the top ten insurers held a 42% market share, and no single insurer exceeded 17% in any major class. This suggests a more fragmented market. In contrast, for Long Term Business, the top ten insurers held 75% of the market, the top five held 55%, and the top one held 16%. This significant concentration, particularly the higher market share held by the top players and the top one insurer, points to a less evenly distributed market compared to General Business. Therefore, General Business is more evenly distributed among authorized insurers.

The question tests the understanding of how policy wording can modify the application of proximate cause. The phrase ‘directly or indirectly’ in an exclusion clause, as illustrated by the court case involving the army officer, broadens the scope of the exclusion. It means that even if the excluded peril (war) was only a remote or indirect cause of the loss (death by train), the exclusion would still apply. Therefore, a loss indirectly caused by war would be excluded under such wording, making the insurer not liable. Options B, C, and D represent interpretations that either ignore the ‘indirectly’ aspect or misinterpret its legal effect in the context of exclusion clauses.

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 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 (a) accurately reflects this definition. Option (b) is incorrect because while an insurer might deal with multiple types of general insurance, the defining characteristic of a composite insurer is the combination of long-term and general business. Option (c) is incorrect as it focuses only on long-term business. Option (d) is incorrect because it describes an insurer that only deals with general business, not a composite one.

The scenario describes a situation where a customer is seeking clarification on policy terms and requesting a duplicate document. According to the provided syllabus, the Customer Servicing department is responsible for handling various types of enquiries, including those seeking guidance and information, as well as requests for documentation like duplicate policies. While public relations and marketing are also mentioned, they focus on broader company image and external communications, not direct customer requests for policy-related information or documents. Complaints handling is a separate function, though it may involve liaison with other departments. Therefore, the primary responsibility for addressing this customer’s needs falls under the Customer Servicing department.

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 specific obligations. These obligations are to inform the relevant regulator (RA) of this non-compliance and to implement additional measures to effectively mitigate the Anti-Money Laundering/Counter-Terrorist Financing (AML/CFT) risks arising from this inability to comply. The question tests the understanding of these specific actions required by the FI in such a cross-border compliance challenge.

The question tests the understanding of how policy wording can modify the application of proximate cause. The phrase ‘directly or indirectly’ in an exclusion clause, as illustrated by the court case involving the army officer, broadens the scope of the exclusion. It means that even if the excluded peril (war) was only a remote or indirect cause of the loss (death by train), the exclusion still applies. Therefore, the insurer would not be liable for the loss. Option B is incorrect because ‘directly caused by’ is generally interpreted to mean proximate cause, not a broader scope. Option C is incorrect because while ‘proximately caused by’ refers to the proximate cause, the ‘directly or indirectly’ wording extends beyond that. Option D is incorrect because the principle of indemnity is about compensation for loss, not the interpretation of causation clauses.

This question tests the understanding of how an agency agreement can be terminated due to a fundamental breach by either party. A fundamental breach is a serious violation of the contract’s terms that goes to the root of the agreement, allowing the non-breaching party to treat the contract as ended. In the scenario, the principal appointing a second agent while the first agent has an exclusive agreement constitutes a fundamental breach. This allows the exclusive agent to cease performing their duties and seek compensation for the loss of expected profits, as per the principles of contract law governing agency relationships. Options B, C, and D describe other potential causes for termination or consequences that are not directly applicable to the described situation of a fundamental breach.

The Code of Practice for the Administration of Insurance Agents, issued by the HKFI with the approval of the Insurance Authority, defines an ‘Insurance Agent’ as a person who advises on or arranges insurance contracts as an agent or sub-agent of one or more insurers. This definition explicitly includes both individual natural persons acting as agents and entities operating as insurance agencies (sole proprietorships, partnerships, or corporations). However, it specifically excludes Responsible Officers and Technical Representatives from this primary definition of an ‘Insurance Agent’ for the purposes of the Code. Therefore, while Responsible Officers and Technical Representatives are crucial roles within the agency structure and are subject to registration and conduct requirements, they are not considered ‘Insurance Agents’ themselves under the Code’s definitional framework.

The question tests the understanding of the concept of ‘Agency by Estoppel’ as defined in contract law within the insurance context. 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 representation, 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 this scenario, Mr. Chan’s consistent allowance of Ms. Lee to present herself as his representative, coupled with his inaction when she uses his company letterhead, creates a representation to potential clients like Mr. Wong. Therefore, Mr. Wong can reasonably assume Ms. Lee has the authority to act on Mr. Chan’s behalf, and Mr. Chan would be estopped from denying this agency.

The question tests the understanding of market concentration in Hong Kong’s insurance sector, specifically differentiating between General Business and Long Term Business. The provided text indicates that in General Business, the top ten insurers held a 42% market share, and no single insurer exceeded 17% in any major class. This suggests a more fragmented market. In contrast, for Long Term Business, the top ten insurers held 75% of the market, the top five held 55%, and the top one held 16%. This significant concentration in Long Term Business, particularly the higher combined share of the top players and the substantial share of the leading insurer, points to a less evenly distributed market compared to General Business. Therefore, General Business is more evenly distributed among authorized insurers.

The scenario describes a situation where a customer is seeking clarification on policy terms and requesting a duplicate document. According to the provided syllabus, the Customer Servicing department is responsible for handling various types of enquiries, including those seeking guidance and information, as well as requests for documentation like duplicate policies. While public relations and marketing are also mentioned, they are distinct functions. Complaints handling is a separate, albeit related, responsibility. Therefore, the primary responsibility for addressing both the customer’s query about policy terms and the request for a duplicate policy falls under the Customer Servicing department’s purview.

This question tests the understanding of how proximate cause applies when multiple perils are involved in a loss, specifically focusing on the relationship between insured and uninsured perils. The scenario describes a chain of events starting with an uninsured peril (master’s negligence) leading to a series of other perils, ultimately causing damage by seawater (an uninsured peril in many cargo policies). According to the principles of proximate cause, if an uninsured peril directly leads to an insured peril, and that insured peril then leads to the loss, the loss is generally covered. In this case, the negligence (uninsured) caused a collision (potentially insured or uninsured depending on policy specifics, but the core issue is the chain), which led to fire (insured), then explosion (insured), then leaks, and finally water damage (uninsured). The key principle illustrated is that if an insured peril is a direct cause in a chain of events, even if initiated by an uninsured peril, the loss can be recoverable under the policy covering that insured peril. The illustration provided in the source material directly supports this by stating that water damage (uninsured) is regarded as a result of the sole insured peril (e.g., fire) in a chain, even if traced back to an uninsured peril. Therefore, the loss is recoverable under the policies that cover the perils within the chain that are considered insured perils.

The Personal Data (Privacy) Ordinance (PDPO) in Hong Kong is a comprehensive piece of legislation designed to protect the privacy of individuals concerning their personal data. It applies broadly to the collection, holding, processing, and use of personal data by both public and private sector organizations. The Ordinance establishes data protection principles that all data users must adhere to, regardless of whether they are government bodies or commercial enterprises. Therefore, it covers all entities that handle personal data.

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 disputes, and the Insurance Ordinance provides the overarching legal framework, the IARB specifically addresses the conduct and registration of agents.

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 ICAC provides resources like the ‘Practical Guide on Professional Ethics for Life Insurance Intermediaries’ to guide intermediaries. Adhering to the principles outlined in such guides and relevant ordinances is crucial for maintaining ethical conduct and avoiding involvement in illicit activities. Option A correctly identifies the proactive steps an intermediary should take to uphold ethical standards and comply with regulations, aligning with the ICAC’s advisory role and the emphasis on vigilance against corruption and fraud.

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 can result in a payout greater than the indemnity value of the old item. 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 the loss. Reinstatement insurance allows the insured to replace the lost or damaged property with new property of a similar kind and quality, which can also result in a payout exceeding the indemnity value of the original item. The condition of average, however, is a condition that limits the payout to a proportion of the loss based on the ratio of the sum insured to the actual value of the property. If the property is underinsured, the condition of average will reduce the payout, ensuring that the insurer only pays up to the indemnity value, not more.

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. Option D is incorrect because Principle 5 focuses on transparency of policies and practices, not the individual’s right to view their own data.

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’s affiliations meet regulatory standards for fitness and properness, as it dictates the scope of oversight and potential conflicts of interest that the regulator might consider. Therefore, understanding this definition is key to assessing an intermediary’s suitability.

The scenario describes a Registered Person (RP) who has failed to submit proof of their Continuing Professional Development (CPD) hours when requested by the Insurance Authority (IA). According to the provided information, 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 applications for registration will not be processed unless they can provide the required proof of compliance. Therefore, the IA would likely revoke the RP’s registration for a specified duration and require proof of compliance before considering any future registration.

The scenario describes an insurance agent who is also licensed as a travel agent and wishes to engage in restricted scope travel insurance business. According to the provided text, an insurance agent engaging in restricted scope travel business must be licensed as a travel agent under the Travel Agents Ordinance. This requirement is explicitly stated in section 6.2.2(f)(x) of the Code. Therefore, the agent must possess this additional license to legally conduct this specific type of business.

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 personal information held about them by an organization. The organization must comply with this request, subject to certain exemptions, and provide the data in an understandable format. The example provided in the source material directly illustrates this right by stating a customer can ask an insurer for a copy of their personal data contained within their policy. Therefore, the most accurate statement reflecting this principle is that a data subject has the entitlement to obtain a copy of their personal information held by a data user.

The scenario describes an insurance agent who is also licensed as a travel agent and wishes to engage in restricted scope travel insurance business. According to the provided text, an insurance agent engaging in restricted scope travel business must be licensed as a travel agent under the Travel Agents Ordinance. This requirement is explicitly stated in section 6.2.2(f)(x) of the Code. Therefore, the agent must hold this additional license to legally conduct this specific type of business.

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.

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 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.

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 required fitness and properness standards, 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.

This question tests the understanding of how proximate cause applies when multiple perils are involved in a loss, specifically focusing on the relationship between insured and uninsured perils. The scenario describes a chain of events starting with an uninsured peril (master’s negligence) leading to a series of other perils, ultimately causing damage by seawater (an uninsured peril in many cargo policies). According to the principles of proximate cause as outlined in insurance law, if an uninsured peril directly leads to an insured peril, and that insured peril then leads to the loss, the loss is generally recoverable under the policy covering the insured peril. In this case, the negligence (uninsured) caused a collision (potentially insured or uninsured depending on the policy), which caused a fire (insured), which caused an explosion (insured), which caused leaks (uninsured), leading to water damage (uninsured). The key is that the chain of events, tracing back from the ultimate loss, involves insured perils (fire, explosion) that were triggered by an uninsured peril. The illustration provided in the syllabus highlights that even if the ultimate cause is an uninsured peril, if it triggers a sequence that includes an insured peril, the loss can be recoverable under the policy covering that insured peril. Therefore, the damage caused by seawater, which was a direct consequence of the chain of events including fire and explosion, would be recoverable under policies covering those specific perils, despite the initial cause being negligence.