IIQE Paper 1 Principles and Practice of Insurance Examination Quiz 54

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 securing Employees’ Compensation (EC) insurance. It functions as a ‘market of last resort,’ ensuring that such employers can obtain the mandatory EC insurance. This is achieved through a market agreement where all EC insurers are members and collectively share the risks. The ECIRS Bureau oversees the operation of this scheme, fulfilling its purpose of providing access to EC insurance for employers who might otherwise be unable to obtain it.

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 insurance business and general insurance business. The scenario describes an insurance company that is licensed to underwrite both life insurance policies and property damage coverage. This dual licensing and operation directly aligns with the definition of a composite insurer. Option B is incorrect because an insurer dealing with only one type of business (either long-term or general) is not composite. Option C is incorrect as the ability to issue endorsements is a standard function of most insurers, not a defining characteristic of a composite insurer. Option D is incorrect because while an insurer must be ‘fit and proper’ to operate, this is a regulatory requirement for all insurers, not specific to the definition of a composite insurer.

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 dealing with frozen property without a license. The question describes a scenario where a financial institution (FI) is aware of a customer whose assets have been frozen under the UNATMO. The FI’s obligation, as per the provided text, is to ensure that no transactions involving this frozen property occur unless explicitly authorized by a license from the Secretary for Security. Therefore, the FI must prevent any dealings with the customer’s frozen assets until such a license is obtained.

The principle of utmost good faith in insurance mandates that both parties, particularly the proposer, must disclose all material facts that could influence a prudent insurer’s decision regarding acceptance of the risk or the premium calculation. A fact that reduces the risk, such as the presence of an automatic sprinkler system, would typically influence the premium. Failing to disclose such a fact, even if it benefits the insurer by leading to a higher premium, constitutes a breach of utmost good faith because it prevents the insurer from accurately assessing the risk and setting the appropriate premium. The law views this from the perspective of a prudent insurer, who would want to know about factors that reduce risk to offer a more competitive premium.

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 aware of how and where to lodge a complaint.

The United Nations (Anti-Terrorism Measures) Ordinance (UNATMO) criminalizes the provision or collection of property, or making property or financial services available to terrorists or their associates. A statutory defence is provided if a report is filed with the Joint Financial Intelligence Unit (JFIU) in the prescribed manner, disclosing the relevant acts. This defence is specifically linked to the act of reporting suspicious property or financial activities, not to general compliance with anti-money laundering guidelines.

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 itself.

Contribution between insurers applies when multiple policies cover the same loss. For contribution to be applicable, several conditions must be met. These include that each policy must provide indemnity (not a fixed benefit), cover the same interest affected, cover the same peril causing the loss, cover the same subject matter, and each policy must be liable for the loss (i.e., not subject to an exclusion that prevents contribution). In this scenario, while both policies cover the same property and the same peril (fire), they are insuring different interests: the owner’s interest in the building and the tenant’s interest in their stock. Since the interests covered are different, contribution between the insurers will not apply.

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. Option B is incorrect because while brokers must be licensed, the question specifically asks about the function of approved bodies. Option C is incorrect as the Code of Conduct for Insurers applies to insurers, not broker associations. Option D is incorrect because while client accounts are a requirement for brokers, it’s not the primary function of the approved bodies themselves.

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 IA has specific guidelines, such as the ‘Guideline on Reinsurance with Related Companies,’ to address potential conflicts of interest and ensure the protection of policyholders when reinsurance is placed with affiliated entities. Therefore, ensuring the quality and collectability of reinsurance is a fundamental requirement.

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 case of the army officer killed by a train during wartime, means that the exclusion applies even if the excluded peril (war) was only a remote or indirect cause of the loss. Therefore, if a policy excludes losses ‘directly or indirectly’ caused by a specific peril, and that peril contributes in any way, even remotely, to the loss, the exclusion will be invoked. The other options describe scenarios where the proximate cause principle might be applied differently or where the wording might not have the same broad exclusionary effect.

The core principle here is that financial institutions (FIs) must establish robust internal controls to prevent employees from “tipping off” customers or others about suspicious activity investigations. This involves not only direct prohibition but also ensuring that customer interactions, particularly during the Customer Due Diligence (CDD) process, are conducted in a manner that does not inadvertently reveal the nature of the inquiry. The Guideline emphasizes proactive measures, such as training staff to recognize unusual activities by understanding customer behavior and transaction patterns, and to report suspicions internally. The risk of tipping off must be a consideration during CDD, and staff must be trained to be sensitive to this. Therefore, the most comprehensive approach to mitigating the risk of tipping off involves a combination of internal controls, staff training, and careful execution of customer interactions.

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.

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 business models differ significantly between these two categories. 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 occurs when a party, without intent to deceive, fails to reveal material facts. The scenario describes an applicant for travel insurance who, due to an oversight rather than deliberate concealment, fails to mention a pre-existing medical condition that is highly relevant to the insurer’s risk assessment. This failure to disclose a material fact, even if unintentional, constitutes a breach of 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 deliberately misleading, but doesn’t mandate proactive disclosure of all facts; ‘Offer’ is the proposal for a contract; and ‘Policy Limits’ define the maximum payout.

The guideline mandates that a Hong Kong-incorporated Financial Institution (FI) with overseas operations must establish a group Anti-Money Laundering/Counter-Terrorist Financing (AML/CFT) policy. This policy should ensure that all overseas branches and subsidiaries conducting similar business implement Customer Due Diligence (CDD) and record-keeping procedures that align with Hong Kong’s requirements, to the extent permitted by local law. If local laws prevent compliance with equivalent Hong Kong standards, the FI must notify its Relevant Authority (RA) and implement additional measures to mitigate the heightened Money Laundering/Terrorist Financing (ML/TF) risks arising from this non-compliance. Simply applying the group policy without considering local legal constraints or failing to inform the RA and implement mitigating measures would be insufficient.

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.

This question tests the understanding of how an agency agreement is terminated due to a fundamental breach by one of the parties. According to agency law, if either the principal or the agent commits a significant violation of the contract’s terms, the non-breaching party has the right to consider the agreement terminated. This termination can be immediate, and the aggrieved party may also seek compensation for any losses incurred due to the breach, such as lost profits. The scenario describes a principal appointing a second agent while an exclusive agency agreement is still in effect, which constitutes a fundamental breach of the exclusivity clause. Therefore, the agent is entitled to end their performance and claim damages.

Subrogation is a legal principle that allows an insurer, after paying a claim, to step into the shoes of the insured and pursue any rights the insured may have against a third party responsible for the loss. This principle is crucial for preventing unjust enrichment of the insured and ensuring that the party causing the loss ultimately bears the financial responsibility. The insurer’s right to subrogation can arise from various legal bases, including tort law, contractual agreements, statutory provisions, or even salvage operations. However, the insurer’s recovery under subrogation is limited to the amount they have paid out as indemnity for the loss; they cannot profit from the subrogation process.

The Insurance Ordinance mandates that authorized insurers maintain adequate reinsurance arrangements. This is a critical aspect of financial supervision, focusing on both the quantity and the collectability of reinsurance. The IA has specific guidelines, particularly for reinsurance with related companies, to mitigate potential conflicts of interest and protect policyholders. While reinsurance is crucial for financial security, the primary regulatory concern is ensuring the insurer’s solvency and the protection of the insuring public, which is directly addressed by requiring adequate reinsurance. The other options, while related to insurance operations, do not represent the core regulatory requirement for reinsurance as a fundamental pillar of financial security and stability.

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 aids in managing distribution channels and assessing their effectiveness. The other options represent different classification methods: ‘Departmental’ refers to the type of insurance product, ‘Type of Client’ differentiates between personal and commercial lines, and ‘Academic Classification’ is a theoretical framework for understanding insurance categories.

The Insurance Claims Complaints Bureau (ICCB) is a key avenue for policyholders dissatisfied with an insurer’s final response. The ICCB’s panel has the authority to make awards against insurers. A crucial aspect of the panel’s power is that the insurer cannot appeal an award made against them. However, the complainant retains the right to pursue legal action if they are unhappy with the panel’s decision. This distinction highlights the finality of the panel’s decision for the insurer, while preserving the complainant’s options.

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. This often results in a payout greater than the depreciated value of the lost item, thus exceeding pure indemnity. Agreed value policies fix the value of the insured item at the commencement of the policy. If the item is lost or destroyed, the insurer pays the agreed value, which might be higher than the market value at the time of the loss, again exceeding strict indemnity. Reinstatement insurance allows the insured to repair or replace the lost or damaged property to a condition substantially the same as it was before the loss, without deduction for depreciation. This can also result in a payout exceeding the depreciated value. The condition of average, conversely, is a condition that limits the payout to the proportion that the sum insured bears to the actual value of the property. If the sum insured is less than the value of the property, the insured becomes their own insurer for the uninsured portion, and the payout is reduced proportionally, thus enforcing indemnity rather than exceeding it.

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 business partnership, each partner typically has an insurable interest in the business’s assets and their own life, as the loss of either could directly impact their financial well-being and the continuation of the business. While a partner might have a general interest in the business’s success, a specific insurable interest in another partner’s life is generally limited to situations like a buy-sell agreement or a loan secured by the partner’s life, which are not implied in the scenario. The business itself, as a legal entity, can insure its assets and liabilities. Therefore, a partner’s insurable interest is primarily in their own life and their share of the business, not directly in the life of another partner unless specific contractual arrangements exist.

The Insurance Claims Complaints Bureau (ICCB) is designed to handle complaints from individual policyholders concerning personal insurance claims. The Panel, appointed by the ICCB, has the authority to make awards against insurers. A key aspect of the Panel’s power is that an insurer cannot appeal an award made against them. However, if a complainant is dissatisfied with the award, they retain the right to pursue legal avenues for redress. This structure ensures a finality for the insurer regarding the Panel’s decision while preserving the complainant’s options if they deem the award insufficient.

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, it specifically excludes individuals acting solely as Responsible Officers or Technical Representatives, as these roles are defined in relation to the primary agent (Individual Agent or Insurance Agency). Therefore, a Responsible Officer or a Technical Representative, by themselves, do not fit the primary definition of an ‘Insurance Agent’ under the Code.

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 they can lodge a complaint.

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 conduct leads a third party to reasonably believe that an agent has authority, even if that authority hasn’t been expressly granted. In the scenario, the principal’s consistent past actions of issuing policies for cargo risks to West Africa, despite an internal prohibition to the agent, created a reasonable belief in the client that the agent possessed the authority to bind the principal for such risks. This aligns with the definition of apparent authority, where the principal’s representations (through their actions) create the appearance of authority in the agent. Actual authority refers to the authority expressly or impliedly given by the principal to the agent. Ratification occurs when a principal approves an unauthorized act after it has happened. Ostensible authority is a synonym for apparent authority, but the question specifically asks for the legal basis of the principal being bound, which is apparent authority.

The Anti-Money Laundering and Counter-Terrorist Financing Ordinance (AMLO) imposes specific obligations on Financial Institutions (FIs) to prevent money laundering and terrorist financing. Section 23 of Schedule 2 of the AMLO mandates that FIs must implement robust safeguards to ensure compliance with Parts 2 and 3 of Schedule 2 and to effectively mitigate money laundering and terrorist financing risks. This includes establishing internal controls and procedures. Failure to do so, or knowingly contravening specified provisions, can lead to criminal offences with penalties including imprisonment and fines. Disciplinary actions by Relevant Authorities (RAs) can also include pecuniary penalties up to the greater of $10 million or three times the profit gained or costs avoided due to the contravention. Therefore, an FI must proactively implement measures to prevent contraventions and reduce risks.

This question tests the understanding of how an agency agreement is terminated due to illegality, a concept covered under the termination of agency relationships in contract law, relevant to the IIQE syllabus. The scenario describes a situation where an agency contract for purchasing goods becomes illegal due to an outbreak of war between the principal’s country and the agent’s country. Under English law, which governs many international commercial contracts, such a situation renders the contract void and automatically terminates the agreement. This is because the performance of the contract would involve trading with an enemy, which is prohibited by law during wartime. Therefore, the agency agreement would cease to have legal effect.