IIQE Paper 1 Principles and Practice of Insurance Examination Quiz 59

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.

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 causal chain. According to the principles of proximate cause, if an uninsured peril (like negligence) leads to an insured peril (like fire), and that insured peril then causes the loss, the loss is generally recoverable. The illustration provided in the syllabus demonstrates a chain of events where negligence (uninsured) leads to collision, then fire (insured), then explosion, and finally water damage. In such a chain, the loss is often attributed to the insured peril that initiated the subsequent events, even if an uninsured peril was the initial trigger. Therefore, the water damage, being a consequence of the fire (an insured peril in many policies), would be recoverable, provided the fire itself was the proximate cause of the water damage, and not an excluded peril.

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. Personal data collected for one purpose (servicing policies with the former employer) cannot be reused for a different purpose (marketing for the new employer) without explicit consent or legal basis. This is a core tenet of data protection, as outlined in the Personal Data (Privacy) Ordinance (PDPO) and further elaborated in guidance for insurance practitioners. The act of copying customer data without authorization and then using it for a new employer’s marketing purposes is a breach of both the original purpose for which the data was collected and the fair collection principle.

The Personal Data (Privacy) Ordinance (PDPO) in Hong Kong mandates that when a data user intends to use personal data for direct marketing, they must provide specific prescribed information to the data subject. This information includes the types of personal data to be used, the categories of marketing subjects, and, if applicable, the classes of persons to whom the data will be provided for direct marketing. Crucially, if the data is provided to others for gain, the data user must also inform the data subject of this fact. The information must be presented in an easily readable and understandable format. The question tests the understanding of these notification requirements under the PDPO for direct marketing purposes.

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 legislation, such as the Insurance Ordinance, is crucial for maintaining ethical conduct and preventing illicit activities. Intermediaries must be vigilant against engaging in or facilitating corrupt practices, which includes being aware of and avoiding actions that could be construed as aiding or abetting illegal acts, even if indirectly.

The Insurance Authority (IA) mandates that insurers undertaking employees’ compensation and motor insurance business must annually commission an actuarial review of their reserves. This review must adhere to specific criteria and result in a report certified by an appointed actuary, which is then submitted to the IA within a stipulated timeframe. This requirement extends to both direct insurers and professional reinsurers. Long-term insurers have an additional 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 Electronic Transactions Ordinance permits electronic submission of these documents. The distinction between reserves and solvency margin is crucial: reserves are estimated future liabilities, while the solvency margin is the surplus of assets over liabilities. Inadequate reserve estimation can lead to an overstatement of net asset value.

This question tests the understanding of product development within the insurance industry, specifically focusing on how insurers adapt to market dynamics. Product research is the core activity that involves monitoring existing products and developing new ones to remain competitive and relevant. While other options relate to insurance operations, they do not directly address the proactive development of new or improved insurance products in response to market trends and competition. Professional indemnity insurance covers liability for negligence, reinsurance is risk transfer, and a proposal form is an application document.

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, and the Insurance Ordinance provides the overarching regulatory framework for the industry, the IARB specifically focuses on the conduct and registration of agents.

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, as stipulated in the conduct requirements for registered persons.

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.

This question assesses the understanding of the role of the accounting department in an insurance company, specifically focusing on the importance of managing receivables. Accurate record-keeping, efficient collection of premiums, and prompt payment of claims are all crucial functions. However, the prompt highlights that ensuring money receivable by the insurer is actually paid directly impacts the company’s existence. This emphasizes the critical nature of the collections function, as it directly influences the insurer’s cash flow and solvency. While other functions are important, the ability to collect what is owed is paramount for survival.

The Insurance Ordinance (Cap. 41) in Hong Kong categorizes insurance business into two primary divisions: General Business and Long Term Business. General Business encompasses a wide array of non-life insurance products, such as property, casualty, and marine 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 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 covers the portion of the loss they initially bore. Therefore, the insured receives $5,000, and the insurer receives $40,000.

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 providing property or financial services 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 approached by a client seeking to transfer funds to an individual on a sanctions list. The FI’s internal policy mandates screening against such lists. The client’s request to transfer funds to a designated individual directly contravenes the prohibition against dealing with frozen property or providing services to designated parties under the UNATMO. Therefore, the FI must refuse the transaction and report it to the Joint Financial Intelligence Unit (JFIU). Option B is incorrect because while reporting is necessary, the primary action is to refuse the transaction. Option C is incorrect as the FI’s internal policy is a means to comply with the law, not a substitute for legal obligations. Option D is incorrect because the UNATMO does not permit the FI to proceed with the transaction under any circumstances without a specific license from the Secretary for Security.

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.

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 defined as a situation where there is only the possibility of loss or no loss, with no chance of financial gain. Conversely, a ‘speculative risk’ involves the possibility of gain as well as loss. ‘Particular risk’ refers to a risk that affects only an individual or a small group, while ‘fundamental risk’ affects a large segment of society or the economy. Therefore, a risk that presents only the potential for loss, without any possibility of a positive financial outcome, is classified as a pure risk.

The Code of Practice for the Administration of Insurance Agents, issued by the HKFI with the approval of the Insurance Authority, defines various terms crucial for understanding the regulatory framework. An ‘Insurance Agent’ is broadly defined 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, the definition specifically excludes ‘Responsible Officers’ and ‘Technical Representatives’ from being considered ‘Insurance Agents’ themselves, as they function in specific capacities within an agency structure. Therefore, a natural person acting as an insurance agent, who is not registered as an insurance agency, falls under the definition of an ‘Individual Agent’ and is thus an ‘Insurance Agent’ for the purposes of the Code.

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 provided via a Notice of Confirmation of Registration. Acting as an agent before this official confirmation can be considered an offense under Section 77 of the Insurance Ordinance, potentially leading to prosecution. Therefore, the registration is effective from the date specified in this official notice, not from the date of application or any other informal communication.

The duty of utmost good faith, which includes the duty of disclosure, generally applies to material facts known to the proposer before the contract is concluded. If a material fact, such as the contraction of malaria, is discovered after the policy has been accepted but before it commences, and the policy terms are silent on this specific point, the proposer is not obligated to disclose it under common law. However, insurers typically include policy wordings that exclude pre-existing conditions, allowing them to deny claims based on the exclusion rather than a breach of utmost good faith.

The Insurance Ordinance (Cap. 41) mandates specific minimum paid-up capital requirements for insurers operating in Hong Kong. For an insurer conducting only general business or only long-term business, but not any statutory (compulsory) insurance business, the minimum paid-up capital is HK$10 million. If the insurer engages in any statutory (compulsory) insurance business, regardless of whether it also conducts other types of insurance business, the minimum paid-up capital requirement increases to HK$20 million. Therefore, an insurer solely focused on long-term business, without engaging in compulsory insurance, needs HK$10 million.

This question tests the understanding of how proximate cause operates when multiple perils are involved, specifically focusing on the relationship between insured and uninsured perils in a causal chain. The scenario describes a sequence of events starting with negligence (an uninsured peril) leading to a collision, then fire, then explosion, and finally water damage. The key principle here is that if an uninsured peril leads to an insured peril, and that insured peril is the direct cause of the loss, the loss is generally recoverable. In this case, the negligence (uninsured) caused the collision, which caused the fire (insured). The fire then caused the explosion and subsequent water damage. The illustration provided in the syllabus highlights that even though the chain started with an uninsured peril, the water damage is considered a result of the insured peril (fire) that directly preceded it, making the loss recoverable under the fire policy. Therefore, the loss is recoverable because the proximate cause of the water damage is the fire, which is an insured peril, even though it was triggered by negligence.

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 definition of approved bodies of insurance brokers under Section 70.

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 payments. If a fire occurs, this stream of income is interrupted, causing a financial loss. Therefore, the landlord possesses insurable interest in the rental income, allowing them to insure against this specific risk. The other options describe situations where insurable interest might exist but are not the primary or direct interest in the loss of rent itself.

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 two primary obligations. First, it must inform its relevant authority (RA) about this non-compliance. Second, it must implement additional measures to effectively mitigate the Anti-Money Laundering/Counter-Terrorist Financing (AML/CFT) risks that arise from this inability to adhere to the stipulated Hong Kong standards. This ensures that even with local legal constraints, the FI actively manages the heightened risks.

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 specifically listed as direct intervention powers in the context of managing rapid growth or potential difficulties arising from it. Restrictions on investments, custody of assets by a trustee, and special actuarial investigations are also intervention powers, but the limitation of premium income is the most direct response to concerns about the volume of new business and its associated liabilities.

Principle 6 of the Personal Data (Privacy) Ordinance grants data subjects the right to access and correct their personal data. This means an individual can request a copy of the information an insurance company holds about them, and if they find it inaccurate, they can ask for it to be corrected. The scenario describes a situation where an individual is seeking to obtain their policy details, which directly aligns with this right of access.

The HKFI’s ‘Guidelines on Complaint Handling’ emphasize that insurers must ensure customers are aware of how and where to lodge complaints. This includes making the internal complaint handling procedures readily available. Publishing these procedures, providing access in all offices, and supplying them freely to customers upon request or automatically to complainants are key components of this accessibility. Informing new customers about the existence of these procedures is also a crucial step in ensuring transparency and ease of use, aligning with the general principles of comprehensive cover and accessibility.

The scenario highlights a situation where a customer is dissatisfied with a policy amendment. According to the syllabus, handling customer complaints is a key responsibility of the Customer Servicing department. This involves ensuring fairness and promptness, and often requires collaboration with other departments to resolve the issue effectively. While public relations and marketing are important for a company’s image, they are not the primary departments responsible for directly addressing and resolving individual customer service issues like policy amendments. Documentation is a function, but the core of the customer’s immediate need is the resolution of their complaint.

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 is distinct from classifying by the type of client (individuals vs. firms) or by the traditional UK/US departmental styles which focus on the type of insurance product.

The Insurance Complaints Committee (ICCB) Panel has the authority to review complaints against insurers. While the terms of the insurance policy are paramount, the Panel can deviate from a strict interpretation if doing so would result in an outcome that is unfair or unreasonable to the complainant. This power is derived from the ICCB Articles of Association, which mandate that the Panel consider general principles of good insurance practice, applicable law, and guidelines from bodies like the Hong Kong Federation of Insurers (HKFI). The Code of Conduct for Insurers, particularly Part III on Claims, emphasizes efficient, speedy, and fair claims handling. Therefore, the Panel’s ability to look beyond the literal policy wording to ensure fairness is a key aspect of its function, provided it aligns with broader principles of good practice and relevant regulations.