IIQE Paper 1 Principles and Practice of Insurance Examination Quiz 57

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 concept of ‘Apparent Authority’ in agency law, specifically as it relates to insurance. Apparent authority arises when a principal’s actions lead a third party to reasonably believe that an agent has authority, even if that authority hasn’t been explicitly granted. This is distinct from agency by estoppel, which typically involves a misrepresentation by the principal that someone is their agent, and the third party relies on that misrepresentation. In this scenario, the insurer’s consistent allowance of the agent to handle policy renewals and collect premiums, without explicitly limiting their authority in this regard to the policyholder, creates an appearance of authority for such actions. Therefore, the insurer would likely be bound by the agent’s actions in renewing the policy, even if the agent exceeded their actual instructions, because the policyholder reasonably relied on the apparent authority presented by the insurer’s conduct.

The Insurance Agents Registration Board (IARB) plays a crucial role in the regulation of insurance intermediaries in Hong Kong. According to the provided text, the IARB has the authority to investigate matters related to registration applications, renewals, and complaints against registered persons. It can also refer these matters for investigation and receive reports. Furthermore, the IARB can direct principals or registered persons to take disciplinary action and has the power to register or revoke the registration of insurance agents, responsible officers, and technical representatives. Finally, it is mandated to report breaches of the Insurance Ordinance or the Code to the Insurance Authority (IA) if a registered person is found to be unfit to be registered. Therefore, all these functions fall within the purview of the IARB’s responsibilities.

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 prevented (estopped) from denying the existence of the agency relationship, even if no actual agency agreement existed. 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 made representations to clients, creates the impression of agency. Therefore, he would be bound by her actions towards clients who relied on this impression, aligning with the definition of Agency by Estoppel.

The HKFI’s ‘Guidelines on Complaint Handling’ emphasize that insurers must ensure their internal complaint handling procedures are accessible to customers. This includes publishing these procedures, making them available in all offices, providing them freely to customers upon request and automatically to complainants, and informing new customers about their availability. The core principle is that customers should be clearly informed about how and where to lodge a complaint.

The question tests the understanding of the Motor Insurers’ Bureau of Hong Kong (MIB) and its role in compensating victims of motor vehicle accidents. The MIB is funded by a surcharge on motor insurance premiums and aims to provide compensation when compulsory insurance is absent, ineffective, or the insurer is in liquidation. Option (a) correctly identifies the MIB’s funding mechanism and purpose. Option (b) describes the Employees’ Compensation Insurance Residual Scheme Bureau, which addresses difficulties in obtaining employees’ compensation insurance for high-risk occupations. Option (c) describes the Insurance Agents Registration Board (IARB), which registers insurance agents and handles complaints against them. Option (d) refers to the Hong Kong Confederation of Insurance Brokers, which is an approved body of insurance brokers.

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.

Guidance Note 4 (GN4) issued by the IARB (now part of the HKFI) provides specific directives for insurance agents to uphold integrity and protect policyholders. A key requirement is that all policy-related documents must be fully completed before a customer signs them. Furthermore, any amendments made to these forms must be initialed by the customer to prevent unauthorized alterations and potential fraud. This ensures transparency and accuracy in the policy application process, safeguarding both the client and the insurer.

This question tests the understanding of reinsurance as a mechanism for insurers to manage their risk exposure. Outward reinsurance involves an insurer transferring a portion of its risk to another insurer or reinsurer. This is a fundamental concept in insurance operations, allowing companies to underwrite larger risks than they could manage on their own and to stabilize their financial results. The scenario describes an insurer seeking to reduce its potential losses from a large portfolio of policies by transferring some of that risk to a third party, which is the definition of outward reinsurance.

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 solicits business, creates a representation to potential clients like Ms. Wong. Therefore, Mr. Chan would be bound by Ms. Lee’s actions under the principle of Agency by Estoppel.

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 full $40,000 they paid. The remaining $5,000 ($45,000 – $40,000) is then returned to the insured, as it covers their initial $10,000 loss, and they have received $5,000 of it back. Therefore, the insured is entitled to $5,000.

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 holds themselves out to advise on or arrange contracts of insurance in or from Hong Kong 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). It also clarifies that the term does not encompass Responsible Officers or Technical Representatives, who are defined separately within the Code in relation to their roles within an agency structure. Therefore, the most comprehensive and accurate description of an ‘Insurance Agent’ according to the Code is one who acts on behalf of insurers to facilitate insurance contracts, encompassing both individual and corporate entities.

The Insurance Authority (IA) Code of Conduct outlines the criteria for determining if an individual is fit and proper to be registered as an insurance intermediary. Clause 6/31 (ix) specifically states that a person must have passed the relevant papers of the Insurance Intermediaries Qualifying Examination (IIQE) recognized by the IA, unless exempted. This demonstrates a fundamental requirement for demonstrating competence and knowledge in the insurance field, which is a key aspect of being fit and proper. While other factors like compliance history, MPF intermediary status, and understanding of duties are important, passing the IIQE is a direct measure of foundational qualification.

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 for insurance agents working remotely or in public, emphasizing the need to safeguard customer privacy. Option (b) is incorrect because while maintaining professionalism is important, it doesn’t directly address the data protection aspect. Option (c) is incorrect as the focus is on preventing unauthorized access to data, not necessarily on the agent’s personal financial gain. Option (d) is incorrect because while customer trust is vital, the primary concern in this specific situation is the secure handling of personal data, not the broader concept of building long-term relationships.

The Insurance Authority (IA) mandates that individuals or entities wishing to operate as insurance brokers in Hong Kong must either obtain direct authorization from the IA or become a member of an approved body of insurance brokers. This ensures a regulated framework for the industry. Option (b) is incorrect because while professional indemnity insurance is a minimum requirement for authorization, it is not the sole alternative to IA authorization. Option (c) is incorrect as meeting minimum capital and net asset requirements is a condition for authorization, not an alternative to it. Option (d) is incorrect because while maintaining separate client accounts is a regulatory requirement, it does not exempt a broker from the primary authorization or membership requirement.

The question tests the understanding of the concept of ‘Apparent Authority’ in agency law, specifically as it relates to insurance. Apparent authority arises when a principal’s actions lead a third party to reasonably believe that an agent has authority, even if that authority hasn’t been explicitly granted. This is distinct from agency by estoppel, which applies when a principal allows someone to appear as an agent without any authority, and the third party relies on that appearance. In this scenario, the insurer’s consistent allowance of the agent to solicit business and handle policy renewals creates a manifestation of authority to the public. Therefore, the insurer would be bound by the agent’s actions in issuing a policy, as the client reasonably believed the agent had the authority to do so based on the insurer’s conduct.

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 of general insurance underwriting.

This question tests the understanding of the fundamental principles of risk management and insurance, specifically the concept of ‘insurable risk’. An insurable risk must possess certain characteristics to be accepted by an insurer. These typically include being definite and measurable, accidental, not catastrophic, and having a large exposure base. The scenario describes a situation where a company is considering insuring against the risk of a sudden, unexpected increase in the price of a key raw material. This type of risk, often referred to as market risk or price volatility, is generally considered difficult to insure through traditional insurance mechanisms because it is often speculative, not purely accidental, and can be influenced by broad economic factors rather than specific, identifiable events. While some financial instruments or specialized insurance products might offer hedging against such risks, it doesn’t fit the standard criteria for a typical insurable risk that an insurance company would underwrite in the same way as, for example, property damage or liability. Therefore, the most accurate assessment is that this risk is likely not insurable through conventional means.

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 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) led to a collision, which in turn caused a fire (an insured peril under the fire policy). The fire then caused the damage. Therefore, the fire is considered the proximate cause of the damage, making the loss recoverable under the fire policy, even though it was initiated by negligence.

This question tests the understanding of when insurable interest is required for different types of insurance contracts, specifically contrasting life insurance with other indemnity contracts. The provided text states that for life insurance, insurable interest is only needed at policy inception. For marine insurance, it’s needed at the time of loss, and this rule is likely applicable to other indemnity contracts. Therefore, a policy on a life where the insurable interest existed at the start but has since lapsed would still be valid if the insured event (death) occurred while the interest was present.

A contract is fundamentally a legally enforceable agreement. While many agreements exist in daily life, such as social arrangements like a lunch appointment, they are not typically considered contracts because they are not intended to have legal consequences. If one party cancels a social engagement, the other party generally cannot pursue legal action. The core of a contract lies in promises or undertakings exchanged between parties, with the expectation of legal recourse if these promises are broken. An insurance policy itself is not the contract but rather the written evidence of an insurance contract, which is the underlying legally binding agreement.

This question tests the understanding of how salvage value impacts the indemnity provided by an insurance policy. When damaged property has residual value (salvage), this value is factored into the calculation of the loss. The insurer can either deduct the salvage value from the payout, allowing the insured to retain the damaged item, or the insurer can take possession of the salvage and sell it, paying the insured the full loss amount. In this scenario, the insurer chose the latter, meaning they paid the full repair cost and then benefited from selling the salvaged vehicle. Therefore, the $5,000 received from selling the wreck reduces the net cost of the loss to the insurer.

Renewal of an insurance contract is legally considered the creation of a new contract, not merely a continuation of the old one. This distinction is crucial because it means that the terms and conditions of the policy can be re-evaluated and potentially altered at the time of renewal, subject to regulatory requirements and the insurer’s underwriting policies. For instance, the insurer might adjust premiums based on updated risk assessments or changes in the policyholder’s circumstances. The concept of ‘continuation’ implies the existing contract simply carries on, which is not the legal reality of renewal. ‘Replacement’ involves substituting a damaged or lost item with a new one, which is a method of indemnity, not the renewal of the contract itself. ‘Revocation’ refers to the cancellation of an agreement, which is the opposite of renewal. ‘Risk financing’ is a broader strategy for managing potential losses, of which insurance is one tool, but it doesn’t specifically define the nature of renewal.

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 B is incorrect because it limits the scope to only one type of business. Option C is incorrect as it refers to an insurer that only handles claims, not the underwriting of different business types. Option D is incorrect because it describes an insurer that exclusively deals with reinsurance, which is a specialized area and not the definition of a composite insurer.

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 its obligations.

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, questionable documentation, or verbal cues that suggest a claim might be fraudulent. 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. Option (a) correctly identifies the intermediary’s obligation to report suspicions, while (b) and (c) describe actions that could be considered assisting fraud or overstepping their role. Option (d) is too passive and doesn’t capture the proactive reporting duty.

The scenario describes an insurance agent handling sensitive customer information outside the traditional office environment. The core principle here, as outlined in the provided text regarding insurance agents working outside the workplace, is the safeguarding of personal data. This includes ensuring that such data is not visible to unauthorized individuals and that confidential conversations are not overheard. Therefore, the agent’s primary responsibility is to maintain the privacy and security of the customer’s information during these interactions.

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, an agreement to facilitate an illegal gambling operation in Hong Kong would be contrary to the law and thus unenforceable.

This question tests the understanding of apparent authority in agency law, a key concept within the IIQE syllabus. Apparent authority arises when a principal’s actions lead a third party to reasonably believe that an agent has the authority to act on the principal’s behalf, even if the agent lacks actual authority. In the scenario, the insurer’s consistent issuance of policies for cargo risks to West Africa, despite the agent being expressly forbidden, creates a situation where a reasonable third party would infer that the agent possesses the authority to bind the insurer for such risks. This is a classic example of apparent authority, where the principal’s conduct (issuing policies) creates the appearance of authority in the agent. Option B is incorrect because actual authority refers to the authority expressly or impliedly granted by the principal to the agent, which is explicitly stated as lacking in this case. Option C is incorrect as ratification occurs when a principal retrospectively approves an unauthorized act, which is not the primary basis for the insurer being bound in this scenario; the ongoing conduct creates the appearance of authority. Option D is incorrect because ostensible authority is synonymous with apparent authority, but the question asks for the specific legal basis, and apparent authority is the more precise term used in this context to describe the situation where the principal’s conduct creates the impression of authority in the agent.

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, and crucially, it must implement additional measures to effectively mitigate the Anti-Money Laundering and 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’s overall AML/CFT framework remains robust.