IIQE Paper 1 Principles and Practice of Insurance Examination Quiz 60

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 greater than the insurer’s payout, the excess amount is then shared with the insured. In this scenario, the insured’s loss was $10,000, and the insurer paid $40,000. The recovery from the third party is $45,000. The insurer is entitled to the first $40,000 of the recovery. The remaining $5,000 ($45,000 – $40,000) is then returned to the insured, as this amount does not exceed the insured’s actual out-of-pocket loss of $10,000. Therefore, the insured receives $5,000, and the insurer receives $40,000.

This question tests the understanding of an insurer’s obligations regarding the financial health and compliance of its members, as stipulated by relevant regulations. Specifically, it focuses on the requirement for an insurer to verify that its members have submitted their financial statements and auditor’s reports according to the membership rules. The correct answer highlights the insurer’s responsibility to ensure these submissions are received and that the auditor’s reports contain no adverse or qualified statements, except those explicitly noted by the insurer in its own report. This demonstrates a proactive approach to risk management and regulatory compliance by ensuring the financial integrity of the entire group or network.

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 the minimum paid-up capital requirements for authorized insurers in Hong Kong, specifically differentiating between general business, long term business, and composite insurers. The provided text states that a general business insurer requires HK$10 million in paid-up capital, while a long-term business insurer requires HK$2 million. A composite insurer, which carries on both general and long-term business, must meet the higher requirement of HK$20 million. Therefore, an insurer carrying on both types of business needs HK$20 million.

This question tests the understanding of an insurance intermediary’s role in preventing and reporting insurance fraud, specifically concerning fraudulent claims. While an intermediary is not a law enforcement officer, they have a duty not to assist in fraud and to report suspicions. This includes being vigilant about suspicious circumstances, doubtful documentation, or verbal cues that suggest a claim is not legitimate. The key is to assist the insurer and the law in combating fraud, but with sensitivity, as the insurer is primarily responsible for investigating and alleging fraud. Therefore, reporting suspicions to the insurer is the appropriate action.

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 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 conflicts of interest and maintain clear lines of responsibility within the insurance industry. Therefore, if Mr. Chan is an authorised insurance broker, he cannot also be an appointed insurance agent for any insurer, regardless of whether he is advising the same or different clients.

This question tests the understanding of the responsibilities of an appointed insurance agent concerning the financial statements and auditor’s reports of their principal, as outlined in the relevant regulatory framework for insurance intermediaries in Hong Kong. Specifically, it relates to the duty to ensure that the principal has received the necessary financial documentation from its members and that any auditor’s reports on these financial statements and minimum requirements do not contain adverse statements or qualifications, unless properly disclosed. The question probes the agent’s proactive role in verifying compliance with membership rules and the quality of financial reporting by the principal’s members, which is a key aspect of maintaining the integrity of the insurance market and protecting policyholders. The correct answer reflects the agent’s obligation to confirm receipt of these documents and to scrutinize auditor’s reports for any adverse findings that need to be reported.

Insurable interest is a fundamental principle in insurance, requiring the policyholder to have a legitimate financial stake in the subject matter of the insurance. This interest must exist at the time of the loss for indemnity to be payable. In the context of a landlord insuring against loss of rent due to a fire, the landlord has a direct financial interest in receiving rent. If a fire occurs and the property becomes uninhabitable, the landlord would suffer a direct financial loss through the cessation of rental income. Therefore, the landlord possesses an insurable interest in the rental income stream, which is a legal right that can be insured.

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, this is an indirect relationship. The direct financial loss would be incurred by the supplier if their operations are disrupted. Therefore, the business owner does not possess the legally recognized relationship to the supplier’s property that would constitute insurable interest for insuring that property.

This question tests the understanding of the core functions within an insurance company and the division of responsibilities. The Accounts department is primarily concerned with financial transactions, record-keeping, and managing the monetary aspects of the business. Determining the insurability of a risk falls under the purview of underwriting, which involves assessing and evaluating potential risks to decide whether to accept them and on what terms. Arranging the launch of a new policy product is a strategic and marketing function, typically handled by product development, marketing, or actuarial departments, not the accounts department. Therefore, both determining risk insurability and arranging new product launches are outside the typical responsibilities of an accounts department.

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.

This question tests the understanding of ‘Non-fraudulent Non-Disclosure’ as a breach of utmost good faith. It arises when a party, without intent to deceive but due to carelessness or oversight, fails to reveal material facts to another party. This is distinct from ordinary good faith, which only requires truthful answers to direct questions and does not mandate proactive disclosure of all known facts. The scenario describes a situation where an applicant, while not intentionally hiding information, omits a detail about a previous minor claim that could influence the insurer’s assessment of risk. This omission, even if unintentional, constitutes a failure to disclose a material fact, thereby breaching the duty of utmost good faith, which is a cornerstone of insurance contracts. The other options describe different concepts: ‘Ordinary Good Faith’ involves not lying or misleading when asked directly, but not necessarily volunteering all information. ‘Offer’ and ‘Offeree’ are fundamental elements of contract formation, not related to disclosure obligations during the application process. Therefore, the applicant’s action, though not fraudulent, falls under non-fraudulent non-disclosure.

The question tests the understanding of how insurers internally classify their business operations. While regulatory classifications exist (like Classes 8-17), insurers often adopt practical classifications for management. The ‘Source of Business’ approach categorizes business based on how it was acquired, such as through agents, brokers, or directly from the public. This method is crucial for managing distribution channels and agent/broker performance. The other options represent different classification methods: ‘Departmental’ focuses on the type of insurance product, ‘Type of Client’ differentiates between personal and commercial lines, and ‘Academic Classification’ is for educational or examination purposes, not typically for internal operational management.

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.

The core principle here is that financial institutions (FIs) must establish robust internal controls to prevent their employees, including appointed insurance agents, from engaging in ‘tipping off’ customers or other individuals about suspicious activity investigations. This involves not only training staff on what constitutes tipping off but also ensuring their customer interactions, particularly during the Customer Due Diligence (CDD) process, are conducted in a manner that avoids inadvertently revealing such investigations. The Guideline emphasizes that FIs need to equip their staff with the knowledge to recognize unusual activities by understanding customer behavior and transaction patterns, and to report suspicions promptly and appropriately, while being mindful of the tipping-off risk. Therefore, a proactive approach to training and process design is crucial.

This question tests the understanding of subrogation, specifically how it operates when an insurer has only partially indemnified a loss due to policy limitations. According to the principles of subrogation, if an insurer pays only a portion of the loss because of policy terms (e.g., a deductible or a limit on coverage), and the insured recovers an amount from a third party that covers the entire loss, the insurer is entitled to a portion of that recovery. This portion is typically proportional to the insurer’s contribution to the loss. The insured retains any amount recovered that exceeds the total loss and the insurer’s payout. Therefore, if the insurer paid HK$80,000 on a HK$100,000 loss, and the insured recovers HK$90,000 from a negligent third party, the insurer is entitled to HK$80,000 of that recovery, leaving the insured with HK$10,000 from the third party. The remaining HK$10,000 of the loss is borne by the insured.

The Insurance Claims Complaints Bureau (ICCB) is a self-regulatory body established by the insurance industry in Hong Kong. Its primary function is to handle complaints from individual policyholders concerning claims arising from personal insurance contracts with its member insurers. The ICCB’s Insurance Claims Complaints Panel, which handles these complaints, has the authority to make awards against insurers. The maximum award amount the Panel can make is HK$800,000. Insurers cannot appeal an award made by the Panel. However, a complainant who is dissatisfied with the Panel’s award retains the right to pursue legal recourse.

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.

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 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 Employees’ Compensation Insurance Residual Scheme Bureau (ECIRS Bureau) was established to address situations where employers, particularly those in high-risk occupations, faced difficulties in obtaining Employees’ Compensation (EC) insurance. It functions as a market of last resort, ensuring that all EC insurers are members and collectively take on these risks. This collective approach is mandated by a market agreement, and the Bureau oversees the scheme’s operation to facilitate insurance for employers who cannot secure it through the standard market.

Guidance Note 4 (GN4) issued by the IARB (now part of the HKFI) provides specific directives on ethical conduct for insurance agents. A key requirement is that agents must not accept blank or incomplete proposal forms from clients. Any necessary amendments to a form must be initialed by the client to ensure transparency and prevent potential fraud or misrepresentation. This practice safeguards both the policyholder and the insurer by maintaining the integrity of the application process.

This question tests the understanding of the fundamental principle of indemnity in insurance, specifically how it applies to the valuation of a loss. The principle of indemnity aims to restore the insured to the financial position they were in immediately before the loss occurred, without allowing for a profit or a greater loss. In the context of property insurance, this typically means the market value of the property at the time of the loss, or the cost to repair or replace it with similar property, whichever is less, to avoid over-indemnification. Option (b) is incorrect because while replacement cost is a basis for settlement, it’s often capped by the actual cash value or the sum insured. Option (c) is incorrect as depreciation is a factor in calculating actual cash value, not a benefit to the insured. Option (d) is incorrect because the principle of indemnity prevents the insured from profiting from a loss; therefore, the payout would not exceed the value of the property lost.

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 material to the insurer’s assessment of the risk or premium.

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 ordinance specifically addresses situations where an individual might act as an agent for an insurer while also operating as a broker, regardless of whether the clients are the same or different. Therefore, an individual cannot be both an appointed insurance agent and an authorised insurance broker at the same time.

A registered person selling long-term insurance must ensure that any illustrations of projected benefits are accompanied by a clear explanation of the assumptions used. This includes clarifying that future bonus or dividend declarations are not guaranteed and that past performance is not indicative of future results. This requirement is crucial for providing the policyholder with a realistic understanding of potential outcomes, as mandated by the conduct regulations for long-term business.

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 requirement to only offer advice within one’s expertise or to consult with superiors if the advice falls outside their knowledge base. Options B, C, and D describe actions that are either not explicitly mandated or are contrary to the principles of responsible advice-giving.

This question tests the understanding of vicarious liability in the context of data protection. Under the Personal Data (Privacy) Ordinance (PDPO), a data user is generally held responsible for the actions of its data processor when personal data is outsourced. The Ordinance specifies that the data subject may seek recourse from the data user, who is liable as the principal for the wrongful acts of its authorized data processor. While the data processor is not directly liable to the data subject, the data user remains accountable. The contract between the data user and data processor can serve as evidence of compliance, but it does not absolve the data user of its primary responsibility to the data subject. Therefore, the data user is liable for the data processor’s contravention.

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.