IIQE Paper 1 Principles and Practice of Insurance Examination Quiz 56

This question tests the understanding of vicarious liability in the context of data protection under Hong Kong law. The Personal Data (Privacy) Ordinance (PDPO) holds data users responsible for the actions of their data processors. Therefore, if a data processor infringes on a data subject’s privacy, the data subject can seek recourse from the data user, who is considered liable as the principal. The contract between the data user and data processor can serve as evidence of compliance, but it does not absolve the data user of their primary responsibility to the data subject. The data processor itself is not directly liable to the data subject for the infringement.

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 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 characteristics typically include being definite and measurable, accidental, not catastrophic, and having a large exposure to loss. The scenario describes a situation where a company is considering insuring against the risk of a sudden, unexpected decline in the value of its digital assets due to a novel cyber threat. This type of risk, while potentially significant, might not be considered easily insurable if its occurrence and financial impact are highly uncertain, difficult to quantify, or if it represents a systemic threat that could affect a large number of policyholders simultaneously, leading to catastrophic losses for the insurer. Therefore, the most appropriate action for the company is to seek expert advice to determine if the risk meets the criteria for insurability under relevant insurance regulations and market practices.

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, it is not the sole alternative to IA authorization. Option (c) is incorrect as meeting minimum qualifications and experience is a prerequisite for authorization or membership, not an alternative to them. Option (d) is incorrect because while proper record-keeping is essential, it does not exempt a broker from the primary requirement of authorization or membership.

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, as this information would not negatively impact the insurer’s decision-making process. Therefore, failing to mention the presence of an automatic sprinkler system, which reduces the risk, does not constitute a breach of utmost good faith.

This question tests the understanding of how salvage value impacts the indemnity provided by an insurer. When damaged property has residual value, 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 dispose of it, paying the full loss amount. Both methods aim to prevent the insured from profiting from the loss and ensure the indemnity does not exceed the actual loss suffered.

The Unilateral Organised Measures Against Terrorism Ordinance (UNATMO) empowers the Secretary for Security to freeze assets suspected of being linked to terrorism. A key provision of the UNATMO is that it is an offence for any person to make property or financial services available, directly or indirectly, to or for the benefit of a terrorist or terrorist associate, unless specifically licensed by the Secretary for Security. This prohibition is designed to cut off financial support to terrorists. The maximum penalty for contravening this provision is 14 years imprisonment and an unspecified fine, reflecting the seriousness of enabling terrorist activities. While the UNATMO also allows for freezing of property with a maximum penalty of 7 years imprisonment for dealing with frozen property without a license, the question specifically asks about making property or financial services available, which falls under the more severe penalty provision.

The Insurance Ordinance (Cap. 41) mandates that any entity wishing to conduct insurance business in or from Hong Kong must first obtain authorization from the Insurance Authority (IA). This authorization process involves meeting specific minimum requirements set by the Ordinance, which include aspects like paid-up capital, solvency margin, the suitability of directors and controllers, and adequate reinsurance arrangements. The IA also issues Guidelines to further assess an applicant’s financial soundness and ongoing suitability. Therefore, the fundamental prerequisite for commencing insurance operations in Hong Kong is securing this formal authorization from the IA.

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 ensuring accessibility. Informing new customers about the existence of these procedures is also a crucial step in this process.

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 conflicts of interest and maintain clear lines of responsibility within the insurance industry. Therefore, if Mr. Chan is an appointed insurance agent for “SecureLife Insurance”, he cannot simultaneously be an authorised insurance broker for “Global Risk Solutions”, regardless of whether the clients are the same or different.

The scenario highlights a situation where a customer is dissatisfied with a policy amendment process, which falls under the purview of customer servicing. While marketing and public relations are important for a company’s image, and sales enhancement programs aim to boost business, the core issue presented is a client’s negative experience with a service request. Therefore, addressing this directly relates to the customer servicing function, specifically handling client interactions and ensuring satisfaction with administrative processes like policy amendments. The prompt emphasizes the need for prompt and fair handling of complaints, which is a key responsibility within customer servicing.

An insurance broker has a fundamental duty to act in the best interests of their clients. This principle is paramount and dictates that a broker should not unduly restrict a client’s options when selecting an insurer. Limiting choices without a valid reason, such as a lack of suitable products or specific client requirements, would violate this duty by potentially preventing the client from obtaining the most appropriate coverage. The other options describe actions that might be permissible under certain circumstances but do not represent a breach of the primary duty to prioritize client interests in the same way as unreasonably limiting insurer selection.

The Insurance Agents Authority (IAA) is the primary regulatory body overseeing insurance intermediaries in Hong Kong. While the Insurance Authority (IA) is the ultimate supervisory authority for the insurance industry, the Insurance Agents Registration Board (IARB), which operates under the auspices of the Hong Kong Federation of Insurers (HKFI), is specifically responsible for the registration and regulation of insurance agents, responsible officers, and technical representatives. The IARB’s functions, as outlined in the provided text, include investigating complaints, referring matters for investigation, receiving reports, requiring disciplinary action, registering/revoking registrations, and reporting breaches to the IA. Therefore, the IARB plays a direct and crucial role in the day-to-day administration and enforcement of the Code of Conduct for Persons Licensed by or Registered with the Securities and Futures Commission (SFC) and the Insurance Agents Registration Board (IARB) Code of Conduct, which governs the conduct of insurance agents.

A ‘simple contract’ is defined by its formation method rather than its complexity. It is valid whether it is made verbally, in writing not under seal, or inferred from conduct. The key characteristic is the absence of strict formal requirements like sealing. While insurance contracts are often evidenced in writing for practical reasons, their validity as simple contracts does not inherently depend on this formality. Option (b) describes a contract by deed, which requires specific formalities. Option (c) describes a situation where an agreement might be legally unenforceable due to a lack of intent to create legal relations, not its formation type. Option (d) describes a contract that is void from the outset, which is a status of a contract, not a type based on formation.

The Insurance Complaints Committee (ICCB) Panel’s powers are guided by its Articles of Association. These articles stipulate that the Panel must consider the policy terms, general principles of good insurance practice, applicable laws, and judicial precedents. Additionally, it must adhere to codes and guidelines from the Hong Kong Federation of Insurers (HKFI) or the Bureau. Crucially, while policy terms generally prevail, the Panel can override them if they lead to an unfair or unreasonable outcome for the complainant. This demonstrates the Panel’s authority to look beyond a strict interpretation of policy wording to ensure fairness, a key aspect of its function in resolving insurance disputes.

This question tests the understanding of vicarious liability in the context of data protection under Hong Kong law. The Personal Data (Privacy) Ordinance (PDPO) holds data users responsible for the actions of their data processors. Therefore, if a data processor infringes on a data subject’s privacy, the data subject can seek recourse from the data user, who is considered liable as the principal. The contract between the data user and data processor can serve as evidence of compliance, but it does not absolve the data user of their primary responsibility to the data subject. The data processor itself is not directly liable to the data subject for the infringement.

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’s Articles of Association, which mandate the Panel to 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 concerning claims, emphasizes efficient, speedy, and fair handling of claims. Therefore, the Panel’s assessment of an insurer’s fairness in claim settlement is a key aspect of its review, allowing it to look beyond the literal policy wording when fairness is compromised.

The scenario describes an individual acting as an insurance agent who also sells MPF schemes. According to the provided text, an insurance agent engaging in selling or advising on MPF schemes is obligated to register as an MPF intermediary with the MPFA. This ensures compliance with regulations governing both insurance and mandatory provident fund products, demonstrating a commitment to regulatory adherence and consumer protection across different financial product categories.

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. However, this duty can be extended or modified by the policy terms. In this scenario, the policy explicitly requires disclosure of material changes in risk during the policy’s term. A change in occupation, especially one that significantly alters the risk profile, falls under this requirement. Therefore, the insured is obligated to inform the insurer about this change to uphold the principle of utmost good faith as stipulated by the policy, even if the change occurred after the initial inception and before renewal.

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.

The Insurance Agents Registration Regulation (Cap. 31 sub. leg. A) mandates that an insurer must ensure that its appointed insurance agents are registered with the Insurance Authority. This registration is a prerequisite for legally conducting insurance business. While insurers have a responsibility to provide training and ensure compliance with codes of conduct, the fundamental legal requirement for an agent to be able to act is their registration. Therefore, an insurer’s primary obligation is to verify and maintain the registration status of its agents.

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 fully aware of how and where to lodge a complaint.

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 or has contravened regulations. Therefore, all these functions fall within the purview of the IARB’s responsibilities.

The Personal Data (Privacy) Ordinance (PDPO) in Hong Kong is designed to protect the privacy of individuals by regulating the collection, holding, processing, and use of personal data. Its scope is broad and encompasses both the public sector and the private sector. This means that government departments, statutory bodies, as well as companies and organizations operating in the private sector, are all subject to the provisions of the PDPO when they handle personal data. Therefore, the Ordinance applies to both sectors.

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 intermediaries or their principals.

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.

The Insurance Agents Registration Board (IARB) has established guidelines concerning the handling of premiums. These guidelines, specifically referenced in the syllabus, recommend particular methods for premium payments. While the Hong Kong Federation of Insurers (HKFI) plays a role in promoting the insurance industry, and the Hong Kong Confederation of Insurance Brokers is an approved body for brokers, neither of these organizations directly issues guidelines on the specific methods of premium handling for agents. Similarly, the concept of ‘franchise’ relates to policy terms and conditions, not the procedural handling of client premiums by agents.

The Insurance Ordinance mandates that authorized insurers maintain adequate reinsurance arrangements. This is a critical component of an insurer’s financial security and is subject to supervisory review by the IA regarding both the quantity and the collectability of the reinsurance. The Guideline on Reinsurance with Related Companies specifically addresses situations where an insurer reinsures with a related entity, aiming to ensure that the insurer’s prudent control over its reinsurance is not compromised, thereby protecting the insuring public. Therefore, the IA’s assessment of reinsurance adequacy is a key aspect of its financial supervision.

The scenario highlights a situation where a Hong Kong-incorporated financial institution (FI) has an overseas branch that cannot comply with Hong Kong’s Customer Due Diligence (CDD) and record-keeping requirements due to local legal prohibitions. According to the provided guideline (7.4.6c), 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 AMLO due to local laws, the FI has two primary obligations. First, it must inform its relevant regulator (RA) of this non-compliance. Second, it must implement additional measures to effectively mitigate the Anti-Money Laundering/Counter-Terrorist Financing (AML/CFT) risks arising from this inability to comply. Option A correctly identifies both these crucial steps. Option B is incorrect because while reporting to the Joint Financial Intelligence Unit (JFIU) might be necessary in specific circumstances (e.g., when section 25A of OSCO/DTROP applies), it’s not the primary or sole action required when local laws prevent compliance with CDD/record-keeping. Option C is incorrect as it only addresses informing the regulator but omits the essential step of implementing additional risk mitigation measures. Option D is incorrect because it suggests seeking an exemption from the regulator, which is not the prescribed course of action when local laws prevent compliance; instead, the FI must inform and mitigate risks.

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 as 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 just the proximate cause to include remote contributing factors. Option D is incorrect as the principle of indemnity is a separate concept related to compensation for loss, not the interpretation of causation in an exclusion clause.