IIQE Paper 1 Principles and Practice of Insurance Examination Quiz 48

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 information an insurer holds about them, and if they find it inaccurate, they can ask for it to be corrected. This right is fundamental to ensuring data accuracy and transparency in data handling practices.

The scenario describes a Registered Person (RP) who has failed to provide requested documentation to the Insurance Authority (IA) regarding their Continuing Professional Development (CPD) compliance. According to the provided text, if an RP fails to respond to a request from the IA to produce proof of compliance with CPD requirements, their registration should be revoked for a period determined by the IA. Furthermore, their future registration applications will not be processed until proof of compliance is provided. This directly aligns with the consequence of non-compliance for failing to respond to IA requests.

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 an insurer that only handles claims, not the underwriting of different business types. Option D is incorrect because it describes an insurer that exclusively deals with reinsurance, which is a specialized area and not the definition of a composite insurer.

The Insurance Authority (IA) has the power to impose requirements on registered persons and principals. If a principal or registered person, including the respondent’s appointed insurance agent, fails to adhere to a directive to take disciplinary or other action, the Insurance and Investment Ombudsman Bureau (IARB) can report this non-compliance to the IA. Subsequently, the IA can impose further disciplinary or other actions on the defaulting party. This reflects the IA’s oversight role in ensuring compliance with regulatory requirements and maintaining the integrity of the insurance industry.

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, assuming no specific inquiry is made about them. In this scenario, the automatic sprinkler system reduces the risk, and its non-disclosure, in the absence of a direct question, does not violate the duty of utmost good faith because it would have led to a lower premium, not a rejection of the risk or an increase in premium.

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.

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 an insurer that only deals with general business. Option D is incorrect because it describes an insurer that exclusively handles long-term business. Therefore, the correct definition aligns with an entity conducting both types of insurance operations.

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 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 cargo policies). However, the key principle here is that if an insured peril (like fire or explosion) is a direct and natural consequence of an uninsured peril, and that insured peril then leads to the final loss, the loss can still be recoverable under the policy covering the insured peril. The illustration provided in the syllabus explicitly states that if an uninsured peril leads to an insured peril, which then leads to the loss, the loss is covered. In this case, negligence (uninsured) leads to collision (potentially insured or uninsured depending on policy), which leads to fire (insured), which leads to explosion (insured), which leads to leaks and seawater damage (uninsured). The critical link is that the damage by seawater is a direct result of the preceding insured perils (fire and explosion). Therefore, the policies covering fire and explosion would be liable for the damage, as these insured perils are the proximate causes of the loss, even though they were initiated by an uninsured peril.

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 because of policy terms (like a deductible or a specific limit), and the insured recovers an amount from a third party that covers the entire loss, the insurer is entitled to a portion of that recovery. This portion is typically proportional to the insurer’s contribution to the loss. The insured, having borne a part of the loss themselves, retains the remaining portion of the recovery. Therefore, the insurer’s recovery is limited to the extent of their payment, and any excess recovery belongs to the insured. Option (a) correctly reflects this principle, stating the insurer can recover up to the amount they paid, and the insured gets the remainder if the recovery exceeds the insurer’s payout. Option (b) is incorrect because it implies the insured receives nothing if the recovery covers the full loss, ignoring the insured’s own contribution to the loss. Option (c) is incorrect as it suggests the insurer is entitled to the entire recovery, regardless of the insured’s partial contribution. Option (d) is incorrect because it misrepresents the principle by stating the insurer can only recover if the third-party payment exceeds the total loss, which is not how subrogation works when the insurer has already paid a portion.

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 included within the broader definition of an ‘Insurance Agent’ for the purposes of the Code.

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. The scenario describes a situation where an insurance practitioner is asked by a client for their personal data. The correct response, in line with Principle 6, is to provide the requested information. Option B is incorrect because while data users should ensure accuracy (Principle 2), the immediate obligation upon request is to provide access. Option C is incorrect as Principle 3 relates to the use of data, not the right of access. Option D is incorrect because while data security (Principle 4) is crucial, it does not supersede the data subject’s right to access their own information.

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 a breach of this duty, as it restricts the client’s ability to secure the most suitable coverage. Similarly, being overly reliant on a single insurer can lead to a lack of objective advice and potentially disadvantage the client. Therefore, a broker must ensure they offer a reasonable range of options and maintain independence from any single insurer to uphold their fiduciary responsibility.

This question tests the understanding of how insurance institutions should manage customer data when agents operate outside the traditional workplace. The key principle is to ensure the confidentiality and security of personal data. Providing clear guidelines and policies to staff on handling sensitive information in public or external settings is crucial. Option (b) is incorrect because while agents should be aware of data privacy, the primary responsibility for establishing the framework lies with the institution. Option (c) is incorrect as simply reminding agents about data protection is insufficient without clear institutional policies. Option (d) is incorrect because while customer consent is important, it doesn’t negate the institution’s duty to implement robust data handling procedures for its staff.

The scenario describes an individual acting as an insurance agent who also sells Mandatory Provident Fund (MPF) schemes. According to the provided text, specifically section 6.2.2(f)(ix), an insurance agent engaging in both insurance and MPF sales must be registered as an MPF intermediary with the Mandatory Provident Fund Schemes Authority (MPFA). This ensures compliance with regulations governing both insurance and MPF products. The other options are incorrect because they either do not address the MPF aspect or suggest registration with bodies not specified for this dual role in the provided text.

The core principle here is that financial institutions (FIs) must establish robust internal controls to prevent their employees, including appointed insurance agents, from inadvertently or intentionally revealing information that could tip off a customer or another party about an ongoing anti-money laundering (AML) or counter-terrorist financing (CFT) investigation. This involves training staff to recognize suspicious activities by understanding normal customer behavior and transaction patterns. When a suspicion arises, the FI must manage the Customer Due Diligence (CDD) process carefully to avoid any actions that could be construed as tipping off. The guideline emphasizes that individual insurance agents, while depositing records with the insurer, remain responsible for ensuring the insurer’s systems comply with record-keeping requirements and that these records are readily accessible to regulatory authorities.

This question tests the understanding of voidable contracts within the context of insurance. A voidable contract is one that can be nullified by one of the parties due to a defect present at the time of formation. In insurance, this often arises from misrepresentation or non-disclosure by the proposer. The key characteristic is that the contract remains valid until the aggrieved party chooses to void it. Option (a) accurately describes this situation where a contract is valid until an election is made to treat it as void due to a defect like misrepresentation at the proposal stage. Option (b) describes an unenforceable contract, which is valid but cannot be enforced due to a procedural or legal technicality, not an inherent defect. Option (c) describes a void contract, which is invalid from its inception and has no legal effect. Option (d) describes a valid contract, which is fully enforceable and has no defects.

Guidance Note 4 (GN4) issued by the IARB (now part of HKFI) provides specific directives for insurance agents to uphold integrity and protect policyholders. One of the key requirements is that agents must not allow customers to sign blank or incomplete policy forms. Any modifications made to a form after the customer has signed must be initialled by the customer to confirm their agreement to the changes. This measure is crucial for preventing misrepresentation and potential fraud, ensuring that the policyholder is fully aware of and consents to all details before the document is finalized. The other options describe actions that are either not explicitly covered by GN4 in this specific context or are generally considered poor practice but not the primary focus of this particular guideline.

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 encompass non-contractual oversight and auditing mechanisms. Therefore, implementing robust internal policies and conducting regular audits are valid ‘other means’ to ensure a data processor’s compliance with data protection requirements, even in the absence of a formal contract.

This question tests the understanding of the fundamental requirement of ‘insurable interest’ in insurance contracts, as outlined in the IIQE syllabus. Insurable interest signifies a legally recognized relationship between the policyholder and the subject of insurance, such that the policyholder would suffer a financial loss if the insured event occurs. Without this legally recognized connection, an insurance contract is void. The scenario describes a situation where a person has a financial stake in an asset but lacks the legally recognized relationship required for insurable interest. Therefore, they cannot effect insurance on it. Option (a) correctly identifies that the absence of a legally recognized relationship prevents the establishment of insurable interest, making the insurance void. Option (b) is incorrect because while a financial loss is a consequence, it’s the legal relationship that establishes the interest. Option (c) is incorrect as the focus is on the legal recognition of the relationship, not just the potential for profit. Option (d) is incorrect because insurable interest is a prerequisite for a valid contract, not a consequence of it.

The Insurance Authority (IA) Code of Conduct outlines specific criteria for determining if an individual is ‘fit and proper’ to be registered. Clause 6/31 (ix) explicitly states that a person must possess the qualifications specified in clauses 61 to 70 of the Code. Clause 6/32 (d)(i)(4) details that a key minimum qualification is successfully passing the relevant papers of the Insurance Intermediaries Qualifying Examination (IIQE) recognized by the IA, unless an exemption is granted. Therefore, failing to have passed the required IIQE papers, without a valid exemption, would mean the individual does not meet the minimum qualifications and thus is not considered fit and proper.

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 specifically aims to provide compensation when compulsory insurance is absent, ineffective, or the insurer is in liquidation. Option (a) correctly identifies the MIB’s funding mechanism and its purpose in addressing gaps in compulsory motor insurance coverage. Option (b) is incorrect because while the MIB deals with motor accidents, its primary focus is not on compensating victims of uninsured drivers in general, but specifically when compulsory insurance is lacking or ineffective. Option (c) is incorrect as the Employees’ Compensation Insurer Insolvency Bureau (ECIIB) deals with insolvency of employees’ compensation insurers, not motor insurance. Option (d) is incorrect because the Insurance Claims Complaints Bureau (ICCB) handles complaints against insurers and their representatives, not compensation for victims of motor accidents.

Registered persons dealing with long-term business are obligated to ensure that any illustrations of projected benefits are accompanied by a clear explanation of the underlying assumptions. This includes detailing any future bonus or dividend declarations and explicitly stating that these projected benefits are not guaranteed. This requirement is crucial for transparency and to prevent policyholders from making decisions based on potentially unrealistic future outcomes. Failing to provide this information misleads the client about the nature of the benefits.

The principle of insurable interest is fundamental to the validity of an insurance contract. It requires that the policyholder must have a legally recognized financial stake in the subject matter of the insurance. This means that the policyholder would suffer a direct financial loss if the insured event occurs. For instance, a person has an insurable interest in their own life, their spouse’s life (often presumed by law), and their property. A creditor generally has an insurable interest in the life of their debtor, but not necessarily in the debtor’s property unless it’s collateral. The scenario describes a situation where a person has a financial relationship with a property but no legal claim or ownership over it. Therefore, they cannot insure it because they would not suffer a direct financial loss if the property were damaged or destroyed, as their interest is not legally recognized in relation to the property itself.

This question tests the understanding of the fundamental principles of risk management and insurance, specifically the distinction between different types of risks. A pure risk is one where there is only the possibility of loss or no loss, with no chance of gain. Speculative risk involves the possibility of both gain and loss. Fundamental risk affects a large segment of the population or economy, while particular risk affects only individuals or specific groups. The scenario describes a situation where a business faces the potential for financial loss due to a natural disaster, but there is no possibility of financial gain from the event itself. Therefore, it exemplifies a pure risk.

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 proactive risk mitigation is essential to compensate for the gap in compliance caused by foreign legal constraints. Simply continuing operations without addressing the increased risk or only reporting the issue without implementing compensatory controls would be insufficient.

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 also 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. Therefore, implementing a robust internal auditing framework for data processors falls under these ‘other means’ of ensuring compliance, even in the absence of a specific contractual clause.

The Anti-Money Laundering and Counter-Terrorist Financing (Financial Institutions) Ordinance (AMLO) imposes specific obligations on Financial Institutions (FIs) regarding customer due diligence and record-keeping. Section 23 of Schedule 2 of the AMLO mandates that FIs must implement robust safeguards to prevent breaches of Parts 2 and 3 of Schedule 2 and to mitigate risks associated with money laundering and terrorist financing (ML/TF). Failure to take all reasonable measures to ensure these safeguards exist and to mitigate risks can lead to disciplinary actions by Relevant Authorities (RAs), including pecuniary penalties. The penalty can be up to the greater of HK$10 million or three times the profit gained or costs avoided due to the contravention. Therefore, an FI that fails to establish adequate internal controls to prevent ML/TF contraventions, and consequently suffers a breach, is liable for disciplinary action and potential penalties.

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 an Insurance Agency or an Individual Agent, respectively, and are not the primary definition of an ‘Insurance Agent’ itself. Therefore, a Responsible Officer or a Technical Representative, while integral to the operation of an insurance agency or individual agent, is not encompassed within the primary definition of an ‘Insurance Agent’ as per the Code.

The Personal Data (Privacy) Ordinance (PDPO) in Hong Kong mandates that when a data user intends to use personal data for direct marketing, they must provide specific prescribed information to the data subject. This information includes the types of personal data to be used, the categories of marketing subjects, and, if applicable, the classes of persons to whom the data will be provided for direct marketing. Crucially, if the data is provided to others for gain, the data user must also inform the data subject of this fact. The information must be presented in an easily readable and understandable format. The question tests the understanding of these notification requirements under the PDPO, specifically focusing on the information that must be disclosed when personal data is shared with third parties for direct marketing purposes.