IIQE Paper 1 Principles and Practice of Insurance Examination Quiz 51

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.

A registered person selling long-term insurance must make reasonable efforts to ensure the policy aligns with the client’s disclosed needs and financial capacity. This includes understanding the client’s situation and recommending a suitable product, rather than pushing any available policy. The other options describe actions that are either not explicitly required or are potentially misleading. Offering a rebate not specified in the policy is prohibited, and while explaining differences is important, it’s secondary to suitability. Focusing solely on favorable aspects of an illustration is also a prohibited practice.

Principle 6 of the Personal Data (Privacy) Ordinance (PDPO) grants data subjects the right to access and correct their personal data. This means an individual can request a copy of the personal information held about them by an organization. The organization must comply with this request, subject to certain exemptions, and provide the data in an understandable format. The example provided in the source material directly illustrates this right by stating a customer can ask an insurer for a copy of their personal data contained within their policy. Therefore, the most accurate statement reflecting this principle is that a data subject has the entitlement to obtain a copy of their personal information held by a data user.

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 requirement. Informing new customers about the existence of these procedures is also a crucial step in ensuring transparency and customer awareness, aligning with the principle of making complaint resolution accessible.

The question tests the understanding of the minimum paid-up capital requirements for authorized insurers in Hong Kong, specifically for a captive insurer. According to the provided syllabus information, a captive insurer has a minimum paid-up capital requirement of HK$2 million. The other options represent different scenarios or incorrect figures. HK$20 million is for carrying on both General and Long Term business, HK$10 million is the minimum for General Business (unless carrying on statutory insurance business), and HK$5 million is not a specified minimum capital requirement in the provided text.

The question tests the understanding of how insurers might internally categorize their business operations. While regulatory classifications exist (like those in the Insurance Ordinance), insurers have flexibility in their internal structures. The U.S. style classification, which clearly separates Life and Non-Life business, with Non-Life further divided into categories like Fire, Marine, Bonding, and Casualty, is a common and practical approach for internal management and operational purposes. Option B describes a classification based on the source of business, which is also a valid internal method but not the primary departmental structure. Option C refers to client type, another internal classification method. Option D describes an academic classification, which is used for study and examination purposes, not typically for internal operational management.

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 these policies. These bonuses can be paid in various forms, such as cash, reversionary (added to the sum assured), or by reducing future premiums. Therefore, bonuses are the direct manifestation of profit sharing for participating policyholders.

The question tests the understanding of the minimum net asset requirements for an incorporated insurance broker. According to the regulations, an incorporated insurance broker must maintain a minimum net asset value of HK$100,000 and a minimum paid-up share capital of HK$100,000 at all times. Option A correctly states these requirements. Option B is incorrect because it only mentions net assets and not paid-up share capital. Option C is incorrect as it suggests a higher net asset requirement and omits the paid-up share capital. Option D is incorrect because it refers to unincorporated brokers and their specific requirements.

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, especially if there isn’t a dedicated investment department. This responsibility is paramount for ensuring the security of assets, achieving competitive returns, and maintaining sufficient liquidity to meet financial obligations. Therefore, the most accurate description of a key accounting responsibility in this context is the prudent management of investments.

The question tests the understanding of the renewal period for an Officer/Technical Representative’s registration. According to the provided syllabus, the registration for an Officer/Technical Representative can be renewed not earlier than three months before its expiry. This ensures that the renewal process can be completed within a reasonable timeframe without being too early, which could lead to administrative inefficiencies, or too late, which could result in a lapse in registration. Therefore, initiating the renewal process within this three-month window is the correct procedure.

A contract is fundamentally a legally binding agreement. While many agreements exist in daily life, not all are intended to have legal consequences, such as a casual social arrangement. The core of a contract involves promises exchanged between parties, where each party expects these promises to be upheld. The insurance policy itself is not the contract but rather the documented evidence of the contractual agreement between the insurer and the insured. The validity of a contract hinges on the presence of essential elements, and if any of these are missing, the agreement may be considered void or otherwise defective, meaning it lacks legal enforceability.

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, operating an insurance business without this prior authorization from the IA is a violation of the regulatory framework.

The Personal Data (Privacy) Ordinance (PDPO) mandates that data users ensure the security of personal data entrusted to data processors. This includes obligating the processor to adhere to data protection principles. While contracts are a primary method, the PDPO allows for ‘other means’ of compliance. These ‘other means’ are not explicitly defined but generally refer to non-contractual oversight and auditing mechanisms that a data user can implement to monitor a data processor’s adherence to data protection requirements. This provides flexibility for situations where a formal contract might not be feasible or sufficient. Options B, C, and D describe specific contractual obligations or good practices, but not the broader concept of alternative compliance methods.

The Insurance Authority (IA) mandates that travel insurance agents, their responsible officers (ROs), and technical representatives (TRs) must complete 3 Continuing Professional Development (CPD) hours annually, starting from August 1, 2008. This requirement is crucial for maintaining their registration status. Failure to meet this requirement can lead to revocation of registration. Specifically, a first-time failure to meet CPD hours typically results in a 3-month revocation, with a requirement to complete outstanding hours upon re-registration. Making a false declaration regarding CPD hours carries a more severe penalty of a 12-month revocation, also requiring completion of outstanding hours. Non-response to requests for proof of compliance will also lead to revocation for a period determined by the IA, and future applications will be contingent on providing proof of compliance.

This question tests the understanding of reinsurance from the perspective of an insurer ceding risk. Outward reinsurance is when an insurer transfers a portion of its own risks 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 risks from other insurers, acting as a reinsurer itself. The scenario describes an insurer seeking to reduce its potential payout on a large policy, which directly aligns with the definition of outward reinsurance.

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 insurance, but for life insurance, it is only required at the inception of the policy. A property management company, acting as an agent for building owners, can secure insurance for the building. If the company is designated as the insured in the policy, it possesses an insurable interest derived from its authority and responsibility to manage the property on behalf of the principals. This interest is sufficient to validate the insurance, even if the company does not hold absolute ownership of the building. The question tests the understanding of how insurable interest can be established through agency and management responsibilities, not just direct ownership.

Terrorist financing, as defined by relevant legislation, involves the provision or collection of property with the intention or knowledge that it will be used, in whole or in part, to commit terrorist acts. This includes situations where the property is not actually used for such acts. Option (b) describes making property or services available to a known or recklessly considered terrorist or associate, which is a form of terrorist financing. Option (c) focuses on the collection or solicitation of property or services for the benefit of a terrorist or associate, also a form of terrorist financing. However, the core definition encompasses the intent or knowledge of use for terrorist acts, making option (a) the most comprehensive and direct definition of terrorist financing itself, covering the intent behind the property’s use.

The core of underwriting in general insurance involves a dynamic process of risk selection and terms determination. Unlike life insurance, where underwriting is largely a one-time event for individual policies, general insurance policies are subject to renewal. This renewal period provides an opportunity for the insurer to re-evaluate the risk, adjust terms, or even decline renewal based on the policyholder’s claims history, changes in risk profile, or evolving market conditions. Therefore, the continuous monitoring of results and individual risks is a fundamental aspect of general insurance underwriting, allowing for adjustments and risk management over the policy’s lifecycle.

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 approved *bodies* that represent them. 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 an approved body.

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 Authority (IA) Code of Conduct outlines the criteria for determining if an individual is fit and proper to be registered. 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 and age are important, the IIQE qualification is a direct measure of the necessary knowledge base.

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 typically in the form of a Notice of Confirmation of Registration. Acting as an unregistered intermediary before this confirmation can lead to prosecution under Section 77 of the Insurance Ordinance. Therefore, the effective date of registration is the date specified by the IARB in this official confirmation notice.

An insurance broker is considered an expert in the insurance field and must act independently of any single insurer. Their primary duty is to their client, the policyholder, who expects impartial advice with their interests being paramount. This expert status means that if a broker fails to exercise reasonable care in advising their client, they could be found guilty of professional negligence. This negligence would give the policyholder the right to seek compensation from the broker, who is mandated to carry Professional Indemnity Insurance to cover such eventualities. An insurance agent, conversely, typically represents the insurer, and while they have ethical obligations to the policyholder, their primary responsibility is to their principal. The level of expertise expected from an agent is generally lower than that of a broker, and they are not statutorily required to hold professional indemnity insurance.

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 aware of 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 address the proactive reporting aspect.

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 has the option to pursue legal recourse.

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 purpose and funding mechanism. Option (b) describes the Employees’ Compensation Insurance Residual Scheme Bureau, which addresses difficulties in obtaining employees’ compensation insurance for high-risk occupations. Option (c) refers to the Insurance Agents Registration Board (IARB), which handles the registration and complaints against insurance agents. Option (d) describes the Insurance Claims Complaints Bureau (ICCB), which deals with complaints against insurers regarding claims.

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. This is a fundamental right ensuring transparency and accuracy in data handling.

The Insurance Authority (IA) mandates that insurance brokers must submit annual audited financial statements and an auditor’s report within six months of their financial year-end. This auditor’s report specifically confirms adherence to minimum regulatory requirements, including those related to financial soundness and operational capabilities. While a broker must disclose their registration number upon request and on business cards, and provide a Customer Protection Declaration for new long-term policies, these are distinct obligations from the annual financial reporting and auditor’s confirmation of compliance with minimum requirements.

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 (e.g., due to a deductible or a policy limit), their recovery from a third party responsible for the loss is limited to the amount they paid. Any recovery exceeding this amount rightfully belongs to the insured. Therefore, if the insurer recovers HK$15,000 from the negligent party, and they had only paid HK$10,000 to the insured, the insurer can retain HK$10,000, and the remaining HK$5,000 belongs to the insured. This aligns with the principle that subrogation is a mechanism for the insurer to be reimbursed for their payout, not to profit from the insured’s loss beyond their indemnity.

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 insurer is not liable even if the excluded peril (war) was only a remote or indirect cause of the loss. This broadens the exclusion beyond what ‘proximate cause’ alone might imply. Therefore, a loss where the excluded peril is a contributing factor, however minor or indirect, would be denied coverage under such wording.