IIQE Paper 1 Principles and Practice of Insurance Examination Quiz 49

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.

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, without this formal authorization from the IA, an entity is legally prohibited from carrying out insurance activities in Hong Kong.

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). Therefore, the agent must hold this additional license to legally conduct this specific type of business.

The question tests the understanding of how insurers internally classify their business operations. While regulatory classifications exist (like those in the Insurance Ordinance), insurers have the freedom to organize their internal departments based on their operational needs. 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. Classifying by source of business (agents, brokers, direct) or type of client (personal, commercial) are also valid internal methods, but the U.S. style departmental breakdown is a more comprehensive operational classification that aligns with distinct product lines and risk management.

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. Firstly, it must inform its relevant authority (RA) about this non-compliance. Secondly, 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 actively manages the heightened risks.

The question tests the understanding of market concentration in different insurance sectors in Hong Kong, as described in the provided text. The text explicitly states that General Business is more evenly distributed among authorized insurers than Long Term Business. This is supported by the statistics provided: in General Business, the top ten insurers held a 42% market share, with no single insurer exceeding 17% in any class. In contrast, for Long Term Business, the top ten insurers accounted for 75% of the market, the top five for 55%, and the top one for 16%. This indicates a significantly higher concentration in Long Term Business, making General Business more evenly distributed.

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, commencing insurance operations without this prior authorization is a violation of the regulatory framework.

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 handling.

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 a specific type of policy rather than the insurer’s business scope. Option D is incorrect because it describes a reinsurance arrangement, not the nature of the insurer’s primary business.

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 power allows them to address non-compliance effectively.

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 item. This can result in a payout greater than the indemnity value of the old 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 a similar kind and quality, which can also lead to a payout exceeding the indemnity value of the original item. The condition of average, conversely, is a condition that prevents over-insurance by ensuring that the payout is proportionate to the sum insured relative to the actual value of the property. If the property is underinsured, the payout is reduced, thus enforcing indemnity rather than exceeding it.

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. Furthermore, it can refer these matters for investigation, receive reports, and mandate disciplinary actions. Crucially, the IARB is responsible for the registration and revocation of registration for Insurance Agents, Responsible Officers, and Technical Representatives. It also reports breaches of the Insurance Ordinance or the Code to the Insurance Authority (IA) if a registered person is deemed unfit to be registered. Therefore, the IARB’s functions encompass oversight, investigation, disciplinary action, and registration, all aimed at ensuring the integrity and proper conduct of insurance intermediaries.

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 of the ECIRS 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 would otherwise be unable to obtain it.

The question tests the understanding of how salvage value impacts the indemnity provided by an insurer. When damaged property has residual value (salvage), the insurer’s liability is reduced by this value. The insured can either keep the salvage and receive a reduced payout, or the insurer can take possession of the salvage and pay the full loss. In this scenario, the damaged vehicle has a salvage value of $5,000. The total repair cost is $20,000. If the insurer pays the full repair cost, they would then be entitled to the salvage. Alternatively, the insured could keep the salvage and receive the repair cost minus the salvage value. Therefore, the maximum the insurer would pay if the insured keeps the salvage is $20,000 (repair cost) – $5,000 (salvage value) = $15,000. This aligns with the principle of indemnity, ensuring the insured is not overcompensated.

The question tests the understanding of the ‘Fitness and Properness’ criteria for registered persons, as outlined in Part E of the Code of Practice for the Administration of Insurance Agents. Specifically, it focuses on the implications of a group of companies for an insurance intermediary. According to the provided text, for the purposes of clause 2.2(b) of the Code of Practice, a ‘Group of Companies’ refers to a relationship where companies are subsidiaries of a holding company or are subsidiaries of each other. This definition is crucial for determining if an intermediary’s affiliations meet regulatory standards for fitness and properness, as regulatory bodies often scrutinize the control and influence within such corporate structures. Therefore, understanding the definition of a group of companies in this context is essential for compliance.

This question tests the understanding of how proximate cause operates in insurance when multiple perils are involved, specifically focusing on the relationship between insured and uninsured perils in a causal chain. 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). The fire then led to an explosion and subsequent water damage. The key is that the insured peril (fire) is a direct and natural consequence of the uninsured peril (negligence) and is the immediate cause of the subsequent events leading to the loss. Therefore, the loss caused by water damage, which was proximately caused by the fire, is recoverable under the policy that covers fire, even though the initial cause was negligence.

The question tests the understanding of the concept of ‘Agency by Estoppel’ within contract law as it applies to insurance. 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 belief, the principal is then 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 has some actual authority, but it appears to be broader than it is. In this scenario, Mr. Chan’s consistent allowance of Ms. Lee to present herself as his representative, coupled with his failure to correct this misrepresentation, creates the conditions for agency by estoppel. Therefore, he would be bound by her actions towards a third party who reasonably relied on this representation.

Guidance Note 4 (GN4) issued by the IARB (now part of HKFI) provides specific directives on agent conduct to uphold integrity and protect consumers. A key requirement is that insurance agents must not accept blank or incomplete proposal forms from clients. Any necessary amendments to a form must be initialed by the customer to ensure transparency and prevent unauthorized alterations. This measure is crucial for safeguarding against misrepresentation and potential fraud, thereby maintaining customer trust and adherence to regulatory standards.

This question tests the understanding of the responsibilities of an authorized insurer concerning its members’ financial reporting and auditor reviews, as stipulated by relevant regulations. Specifically, it focuses on the insurer’s duty to ensure that its members submit their financial statements and auditor’s reports in line with the organization’s rules. The question also probes the insurer’s obligation to review these reports for any adverse statements or qualifications from auditors, and to report any such findings. Option (a) correctly encapsulates these dual responsibilities: verifying the receipt of financial statements and auditor reports according to membership rules, and reviewing these reports for adverse auditor comments. Option (b) is incorrect because while reviewing auditor reports is important, it’s only one part of the overall responsibility and doesn’t include the initial verification of receipt. Option (c) is too narrow, focusing only on the review of auditor reports and omitting the crucial step of ensuring the statements themselves are received. Option (d) is incorrect as it focuses solely on the receipt of financial statements and overlooks the equally important review of the auditor’s findings.

The Insurance Agents Registration Board (IARB) has specific procedural requirements for processing applications. According to the provided text, the IARB is not obligated to review an application if it is not submitted in the prescribed format, is incomplete, or if requested information has not been fully provided. This emphasizes the importance of adhering to the formal application process and supplying all necessary documentation for the IARB to consider the application.

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 addresses the conduct and registration of agents.

This question tests the understanding of product development within the insurance industry, specifically focusing on how insurers adapt to market dynamics. Product research is the systematic process of identifying market needs, evaluating existing products, and developing new ones to remain competitive and relevant. This involves analyzing trends, competitor offerings, and customer feedback to innovate and refine insurance solutions. Options B, C, and D describe related but distinct activities. ‘Portfolio development’ is a broader strategy that might incorporate product research, but it’s not the research itself. ‘Professional indemnity insurance’ is a specific type of coverage, not a product development process. ‘Reinsurance’ is a risk management technique for insurers, not a customer-facing product development activity.

This question tests the understanding of how an agency relationship can be established, specifically focusing on the concept of implied actual authority. Implied actual authority arises from the conduct of the principal, the course of dealing between the principal and the agent, or other circumstances that suggest the principal has consented to the agent acting in a certain way, even if not explicitly stated. In the scenario, the principal’s consistent acceptance of similar, albeit unauthorized, actions by the agent creates a pattern of conduct that implies authority. This differs from express authority (explicitly granted), apparent authority (based on the principal’s representation to a third party), and ratification (post-act approval). Therefore, the principal’s past behaviour is the key factor in establishing implied actual authority in this context.

The Personal Data (Privacy) Ordinance (PDPO) in Hong Kong is a comprehensive piece of legislation designed to protect the privacy of individuals concerning their personal data. It applies broadly to the collection, holding, processing, and use of personal data by both public and private sector organizations. The Ordinance establishes data protection principles that all data users must adhere to, regardless of whether they are government bodies or commercial enterprises. Therefore, it encompasses all entities that handle personal data.

The question tests the understanding of ‘Renewal’ in the context of insurance contracts. Renewal of an insurance contract is legally considered the creation of a new contract, rather than a simple continuation of the old one. This is because the terms, conditions, and premiums are typically reassessed and agreed upon for the new period. Therefore, the statement that renewal constitutes a new contract is accurate.

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, brokers must keep detailed records of all transactions involving insurers, clients, and themselves, as well as all income and expenses, and their assets and liabilities. These records are required to be retained for a minimum of seven years. Therefore, the primary purpose of these record-keeping requirements is to ensure transparency, accountability, and the ability to verify the broker’s financial health and operational integrity.

This question tests the understanding of the core functions within an insurance company and the division of responsibilities. The Accounts department is primarily concerned with financial transactions, record-keeping, and managing the monetary aspects of the business. Determining the insurability of a risk falls under the purview of underwriting, which involves assessing and evaluating potential risks to decide whether to accept them and on what terms. Arranging the launch of a new policy product is a strategic and marketing function, typically handled by product development, marketing, or actuarial departments, not the accounts department. Therefore, both determining risk insurability and arranging new product launches are outside the typical responsibilities of an accounts department.

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 requirement to only offer advice within one’s expertise or to consult with superiors if unsure, ensuring the client receives accurate and appropriate guidance. Options B, C, and D describe actions that are either not explicitly mandated or are contrary to the principles of responsible advice-giving.

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 operational characteristics of these two categories differ significantly. Therefore, ‘Long Term Business’ is the correct counterpart to ‘General Business’ as defined by the Ordinance.

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 may be higher than the market value at the time of the loss. 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 clause designed to prevent underinsurance by ensuring that the payout is proportionate to the value insured. If the sum insured is less than the value of the property, the claim payment is reduced proportionally, thus enforcing indemnity and preventing a payout greater than the loss.