IIQE Paper 1 Principles and Practice of Insurance Examination Quiz 50

The Insurance Complaints Committee (ICCB) Panel’s powers are guided by its Articles of Association. These stipulate that the Panel must consider the policy terms, general principles of good insurance practice, applicable law, and guidelines from bodies like 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 means the Panel has discretion to look beyond a literal interpretation of the policy to ensure fairness, particularly in claims handling, referencing standards like the Code of Conduct for Insurers which emphasizes efficient, speedy, and fair claims settlement. Therefore, the Panel’s authority extends to interpreting policy terms in a manner that upholds fairness, even if it deviates from a strict reading.

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 text, 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 context.

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 requirement for an agent to be legally authorized to act is their registration. Therefore, an insurer’s primary obligation regarding an agent’s ability to solicit business is to confirm their valid registration.

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 situation where an exclusive agent discovers the principal has appointed another agent before the agreed-upon term, which constitutes a fundamental breach of the exclusivity clause. Therefore, the agent can end the contract and claim damages for the expected profits.

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 concerning the acts disclosed. The question describes a scenario where an insurance intermediary facilitates a transaction that could be construed as providing financial services to a known associate of a terrorist organization. By reporting this suspicion to the JFIU, the intermediary is availing themselves of the statutory defence against potential offenses under the UNATMO, specifically related to making financial services available to terrorist associates.

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. The scenario describes a chain of events starting with an uninsured peril (master’s negligence) leading to a series of other perils, ultimately causing damage by seawater (an uninsured peril in many marine cargo policies). According to the principles of proximate cause, if an uninsured peril leads to an insured peril, and that insured peril then leads to the loss, the loss is generally covered. In this case, negligence (uninsured) caused a collision (potentially insured or uninsured depending on policy specifics, but the core issue is the chain), which caused fire (insured), which caused an explosion (insured), which caused leaks (uninsured), leading to water damage (uninsured). The key is that the chain of events, originating from negligence, ultimately involved insured perils (fire, explosion) before the final uninsured peril (water damage). The illustration provided in the syllabus highlights that even if the ultimate cause is an uninsured peril, if it is linked through a chain of events that includes insured perils, the loss can be recoverable under the policies covering those insured perils. Therefore, the damage caused by seawater, which was a consequence of a chain of events including fire and explosion, would be recoverable under policies covering fire and explosion, as these are considered proximate causes in the chain.

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, but 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.

This question tests the understanding of the Insurance Authority’s (IA) oversight responsibilities concerning the financial health and compliance of licensed insurers, specifically focusing on the requirements for receiving and reviewing financial statements and auditor’s reports from member entities. The Insurance Ordinance, particularly provisions related to the prudential supervision of insurers, mandates that the IA must be satisfied that insurers are financially sound and compliant with regulations. This includes verifying that the insurer has obtained the necessary financial statements and auditor’s reports from its members, as stipulated by its own membership rules and regulations. Furthermore, the IA is responsible for reviewing these reports to ensure they do not contain adverse statements or qualifications that would indicate financial distress or non-compliance, except for those explicitly disclosed and addressed. Therefore, the IA’s role encompasses both the receipt of these documents and the critical assessment of their content to maintain market stability and protect policyholders.

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, create the impression for the client that the agent possesses the authority to bind the principal for such risks. This reliance by the third party on the principal’s past conduct is the foundation of apparent authority. Option B is incorrect because actual authority refers to authority expressly or impliedly given by the principal directly to the agent. Option C is incorrect as ratification occurs when a principal retrospectively approves an unauthorized act, which is not the case here; the principal’s prior conduct is the basis. Option D is incorrect because ostensible authority is synonymous with apparent authority, but the explanation focuses on the specific mechanism of how it arises through the principal’s conduct and the third party’s reasonable belief.

The principle of insurable interest is fundamental to the validity of an insurance contract. It requires that the policyholder must have a legally recognized relationship with the subject matter of the insurance, such that they would suffer a financial loss if the insured event occurs. Without this connection, the contract is void. In this scenario, while the business owner has a financial interest in the success of their supplier, this is an indirect relationship. The direct financial loss would be incurred by the supplier if their operations are disrupted. Therefore, the business owner does not possess the legally recognized relationship to the supplier’s property or operations that would grant them insurable interest in insuring the supplier’s factory.

The scenario describes an insurance practitioner moving to a new company and taking copies of their former customers’ policy information. This action directly violates the principle of using personal data only for the purpose for which it was originally collected. The guidance note explicitly states that using a former customer’s data for marketing products or services of a new employer is unlikely to be within the original purpose of collection. Therefore, the practitioner’s actions are inconsistent with the “no change in purpose of use of data” principle, which is a key consideration in direct marketing practices under data protection regulations.

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 concerning the acts disclosed. Therefore, reporting suspicious activities to the JFIU is a crucial step to avoid liability under the UNATMO for such actions.

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 prevents the insured from recovering twice for the same loss and ensures that the party at fault bears the ultimate financial responsibility. The insurer’s right to subrogation is limited to the amount it has paid out as indemnity, meaning it cannot profit from the recovery. While subrogation can arise from various legal bases such as tort, contract, or statute, its core purpose is to transfer the insured’s recovery rights to the insurer.

The provided text outlines the requirements for an individual to be appointed as an Insurance Agent. Specifically, section 6/25 (v) mandates that the appointment must be in writing via an agency agreement that requires the agent to adhere to Part F of the Code, which details minimum requirements for such agreements. This ensures a formal and compliant contractual relationship is established, covering essential operational standards.

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.

Terrorist financing, as defined by relevant legislation, encompasses the provision or collection of property with the intent or knowledge that it will be used to commit terrorist acts. This includes situations where property is made available to a known terrorist or associate, or where funds are solicited for such individuals. The key element is the connection to terrorist activities, either through the intended use of the property or the recipient’s status as a terrorist or associate. Option (a) accurately reflects this broad definition by covering both the intent/knowledge of use for terrorist acts and the provision of services to known terrorists or associates. Option (b) is too narrow as it only focuses on making property or services available to a known terrorist or associate, omitting the intent/knowledge of use for terrorist acts. Option (c) is also too narrow, focusing solely on the collection or solicitation of funds for a known terrorist or associate, and not the broader provision of property or services.

An insurance broker has a fundamental duty to prioritize their client’s interests above all other considerations. This principle is paramount when providing advice or arranging insurance. Limiting a client’s choices of insurers without a valid reason would be contrary to this duty, as it restricts the client’s ability to secure the most suitable coverage. Similarly, being overly reliant on a single insurer could compromise the broker’s ability to offer the best options, potentially disadvantaging the client. Therefore, maintaining independence and offering a broad range of suitable choices are essential components of acting in the client’s best interest.

The core of underwriting in general insurance involves a continuous assessment of risks. Unlike life insurance, where underwriting is a singular event at policy inception, general insurance policies are subject to periodic review at renewal. This allows the insurer to adjust terms, premiums, or even decline renewal based on evolving risk profiles or claims experience. Therefore, the ability to modify or terminate coverage at renewal is a fundamental aspect of managing risk in this sector, reflecting the dynamic nature of general insurance underwriting.

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 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 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 concerning the acts disclosed. The question asks about the primary objective of the UNATMO, which is to prevent the financing of terrorist acts, aligning with UNSC Resolution 1373 and FATF Special Recommendations on Terrorist Financing. Option B is incorrect as it describes a different offence under UNATMO. Option C is incorrect as it misrepresents the scope of the statutory defence. Option D is incorrect as it describes the ‘tipping off’ offence, which is distinct from the core prohibition.

This question tests the understanding of reinsurance, specifically the distinction between outwards and inwards reinsurance. Outwards reinsurance occurs when an insurer seeks to transfer some of its risk to another insurer or reinsurer. This is a common practice to manage exposure and capacity. Inwards reinsurance, conversely, is when an insurer accepts risk from another insurer, effectively acting as a reinsurer itself. The scenario describes an insurer transferring a portion of its newly underwritten motor insurance portfolio to a specialized firm. This act of passing on risk to another entity is the definition of outwards reinsurance.

The core of underwriting in general insurance involves a continuous assessment of risks. Unlike life insurance, where underwriting is a singular event at policy inception, general insurance policies are subject to regular renewal. This renewal process provides insurers with the opportunity to re-evaluate the risk profile of the insured and adjust terms, premiums, or even decline renewal if the risk has become unacceptable. This dynamic nature allows for flexibility in managing the insurer’s exposure to changing circumstances, making the underwriting process iterative rather than a one-time decision.

The Conduct of Insurance Agents for General Insurance Business and Restricted Scope Travel Business mandates specific professional behaviours. Agents are required to identify themselves before engaging in business discussions to ensure transparency and allow clients to know who they are dealing with. Furthermore, they must provide advice only when they possess the necessary knowledge and expertise to do so, preventing misguidance. A crucial aspect of their duty is to clearly explain policy coverage and ensure the client comprehends the terms and benefits of the insurance product they are purchasing, thereby upholding the principle of utmost good faith and preventing future disputes. While explaining policy differences when making comparisons is good practice, it is not explicitly listed as a mandatory inclusion in the core conduct requirements for these specific business types in the same way as the other three points. Therefore, points (ii), (iv), and (i) are the essential inclusions.

The Insurance Authority (IA) is responsible for ensuring that individuals appointed as registered persons are fit and proper. When an applicant is undergoing the registration process, the appointing Principal or Insurance Agent has a duty to inform the IA of any changes in the applicant’s circumstances that might influence the IA’s decision. This proactive disclosure is crucial for maintaining the integrity of the registration system and ensuring that only suitable individuals are appointed. Failure to provide such information or to notify the IA of relevant changes can lead to the application not being considered or, if already registered, potential disciplinary action.

The question tests the understanding of the minimum net asset requirements for different types of insurance brokers. An unincorporated insurance broker is required to maintain a minimum net asset value of HK$100,000 at all times. An incorporated insurance broker has a dual requirement: a minimum net asset value of HK$100,000 and a minimum paid-up share capital of HK$100,000. Therefore, the incorporated broker has a higher overall financial requirement.

This question tests the understanding of product development in the context of insurance. The scenario describes an insurer actively researching and creating new insurance products to remain competitive and relevant in the market. This aligns directly with the definition of ‘Product Research’ as monitoring and developing existing and new products to keep in line with trends and market competition, as outlined in section 4.1(c) of the syllabus. The other options are related but do not specifically describe the proactive development of new insurance offerings based on market analysis.

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 text, 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 context.

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. Agreed value policies fix the value of the insured item at the outset of the policy. If the item is a total loss, the insurer pays the agreed value, which might be higher than the market value at the time of the loss. Reinstatement insurance allows the insured to replace the lost or damaged property with new property of similar kind and quality, without deduction for depreciation. This also can lead to a payout exceeding the indemnity value. The condition of average, however, is a condition that applies when the sum insured is less than the value of the property. In such cases, the claim payment is reduced proportionally, ensuring the payout is strictly an indemnity and preventing over-insurance. Therefore, ‘New for Old’ cover, Agreed value policies, and Reinstatement insurances are the provisions that can result in more than indemnity being payable.

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 engaged in the 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 agent before this official confirmation can be considered an offense under Section 77 of the Insurance Ordinance, potentially leading to prosecution. Therefore, the effective date of their ability to conduct business is the date specified in this official notice.