IIQE Paper 1 Principles and Practice of Insurance Examination Quiz 47

This question tests the understanding of vicarious liability in the context of data protection under Hong Kong law. The Personal Data (Privacy) Ordinance (PDPO) holds data users responsible for the actions of their data processors. Therefore, if a data processor infringes on a data subject’s privacy, the data subject can seek recourse from the data user, who is considered liable as the principal for the data processor’s wrongful acts. The contract between the data user and data processor can serve as evidence of compliance, but it does not absolve the data user of their primary responsibility to the data subject. The data processor itself is not directly liable to the data subject for infringing their privacy.

The core principle here is that financial institutions (FIs) must establish robust internal controls to prevent their employees, including appointed insurance agents, from engaging in ‘tipping off’ customers or other individuals about suspicious activity investigations. This involves training staff to recognize unusual transactions by understanding customer behavior and to conduct customer due diligence (CDD) in a manner that avoids inadvertently revealing an ongoing investigation. The Guideline emphasizes that FIs need to ensure their staff are aware of and sensitive to the risk of tipping off during CDD processes. Therefore, a proactive approach to training and process design is crucial to prevent such disclosures.

The question tests the understanding of how insurers internally classify their business operations. While regulatory classifications exist (like those in the Insurance Ordinance), 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, but not universally applied, internal classification methods. ‘Departmental’ is a common classification, but ‘Source of Business’ is a distinct and valid approach. ‘Type of Client’ is also a valid classification, but ‘Source of Business’ is a more specific operational management perspective. ‘Academic Classification’ is used for educational and examination purposes, not typically for internal insurer operations.

Guidance Note 4 (GN4) issued by the IARB (now part of HKFI) provides specific directives for insurance agents to ensure customer protection and ethical conduct. One of these key directives, as outlined in the provided text, is that insurance agents must not allow customers to sign blank or incomplete forms. Any modifications to a form must be initialed by the customer to prevent potential misuse or misrepresentation. This practice safeguards against forgery and ensures that the customer is fully aware of and agrees to all details before signing.

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, specifically section 6.2.2(f)(x), an insurance agent engaging in restricted scope travel business must be licensed as a travel agent under the Travel Agents Ordinance. This requirement is a prerequisite for them to be registered to conduct this specific type of insurance business. The other options are either general requirements for all insurance agents or relate to different aspects of their operations, not specifically the licensing requirement for travel insurance.

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.

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 ML/TF risks. Failure to do so can result in criminal offences and disciplinary actions. The question tests the understanding of the proactive measures FIs are legally required to take under the AMLO to manage and reduce their exposure to financial crime risks, rather than reactive measures or specific reporting thresholds.

This question tests the understanding of how subrogation proceeds are shared when the recovery from a negligent third party exceeds the total loss suffered by the insured. In the ‘Excess’ method of sharing subrogation proceeds, the insurer is typically reimbursed first for the amount they paid out. If the recovery is more than the insurer’s payout, the excess amount is then shared with the insured. In this scenario, the insured’s loss was $10,000, and the insurer paid $40,000. The total loss covered by the insurer was $40,000. The recovery from the third party is $45,000. The insurer is entitled to be reimbursed up to the amount they paid, which is $40,000. The remaining $5,000 ($45,000 – $40,000) is then returned to the insured, as it represents the portion of their loss that was not covered by the insurance payment (their $10,000 excess loss). Therefore, the insured receives $5,000 and the insurer receives $40,000.

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 omission, even if unintentional, constitutes a breach of the duty of utmost good faith, as it involves the failure to disclose a material fact. Option B is incorrect because ‘Ordinary Good Faith’ only requires truthful answers to specific questions, not proactive disclosure of all known facts. Option C is incorrect as ‘Offer’ and ‘Offeree’ are contract formation terms. Option D is incorrect because ‘Peril’ refers to the cause of loss, not the failure to disclose information.

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 hold this additional license to legally conduct this specific type of business.

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. It can also refer these matters for investigation and receive reports. Furthermore, the IARB can direct principals or registered persons to take disciplinary action and has the power to register or revoke the registration of insurance agents, responsible officers, and technical representatives. Finally, it is mandated to report breaches of the Insurance Ordinance or the Code to the Insurance Authority (IA) if a registered person is found to be unfit or has contravened regulations. Therefore, all these functions fall within the purview of the IARB’s responsibilities.

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 liability on a large portfolio of policies, which directly aligns with the definition of outward reinsurance.

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 out in various ways, such as cash payments, reducing future premiums, or increasing the sum assured. Therefore, bonuses are the direct manifestation of profit sharing in participating policies.

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, particularly when a dedicated investment department is absent. This responsibility is paramount for ensuring the security of funds, achieving competitive returns, and maintaining sufficient liquidity to meet financial obligations, all of which are directly tied to the insurer’s financial health and operational continuity. The other options represent important but distinct accounting functions that do not encompass the strategic management of company investments.

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 often adopt practical classifications for management. The U.S. style of classification clearly separates Life and Non-Life business, with Non-Life further broken down into categories like Fire, Marine, Bonding, and Casualty. Casualty, in this context, broadly encompasses various liability and accident-related insurances, including motor vehicle liability and general liability. Therefore, motor vehicle liability and general liability would typically fall under the ‘Casualty’ sub-category within the Non-Life segment of a U.S.-style classification.

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 common knowledge and facts already known to the insurer are exceptions, a fact that reduces the risk, such as the presence of a sprinkler system, is still considered relevant to the insurer’s assessment of the risk and premium calculation, even if it lowers the risk. Therefore, its non-disclosure, even if it would have led to a lower premium, is a breach of utmost good faith because it impacts the insurer’s judgment.

The Anti-Money Laundering and Counter-Terrorist Financing (Financial Institutions) Ordinance (AMLO) imposes specific obligations on Financial Institutions (FIs) to mitigate risks. Section 23 of Schedule 2 of the AMLO mandates that FIs must implement robust safeguards to prevent breaches of requirements outlined in Parts 2 and 3 of Schedule 2, and to reduce the likelihood of money laundering and terrorist financing (ML/TF). This proactive approach to risk management is a fundamental principle of the ordinance. While customer due diligence (CDD) and record-keeping are crucial components, the broader requirement to establish and maintain proper safeguards to mitigate ML/TF risks encompasses these and other preventative measures. The Drug Trafficking (Recovery of Proceeds) Ordinance (DTROP) and the Organized and Serious Crimes Ordinance (OSCO) deal with the proceeds of drug trafficking and indictable offences respectively, and while related to combating financial crime, the question specifically asks about the AMLO’s requirements for FIs to prevent contraventions and mitigate risks.

The Insurance Agents Registration Regulation (Cap. 31 sub. leg. R) mandates that insurance agents must be registered with the Insurance Authority. This registration is a prerequisite for legally conducting insurance business in Hong Kong. While insurers have a responsibility to ensure their agents comply with laws and codes, and agents must adhere to ethical practices, the fundamental requirement for an individual to act as an insurance agent is their registration.

This question tests the understanding of the fundamental requirement of insurable interest in insurance contracts, as outlined in the Insurance Ordinance. For an insurance policy to be legally valid, the policyholder must have a demonstrable 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. Without this legally recognized relationship, the contract is void. Option (a) correctly identifies that a person must have a legally recognized relationship to the subject matter of insurance, which would result in financial loss if the insured event occurs. Option (b) is incorrect because while a financial relationship is often the basis, it must be legally recognized and lead to a loss, not just any financial connection. Option (c) is incorrect as it focuses solely on the existence of a financial relationship without the crucial element of legal recognition and potential loss. Option (d) is incorrect because while a financial loss is a consequence, the primary requirement is the legally recognized relationship to the subject matter that *causes* that potential loss.

The Insurance Ordinance in Hong Kong categorizes insurance business into Long Term Business and General Business. Long Term Business is further subdivided into various classes, including ‘Life and annuity’ (Class A), ‘Marriage and birth’ (Class B), ‘Linked long term’ (Class C), ‘Permanent health’ (Class D), ‘Tontines’ (Class E), ‘Capital redemption’ (Class F), and three categories for ‘Retirement scheme management’ (Classes G, H, and I). General Business is divided into 17 classes, starting with ‘Accident’ (Class 1) and including ‘Sickness’ (Class 2), ‘Land vehicles’ (Class 3), and property insurance for ‘Railway rolling stock’ (Class 4), ‘Aircraft’ (Class 5), ‘Ships’ (Class 6), and ‘Goods in transit’ (Class 7). The question asks to identify a class that falls under General Business, and ‘Ships’ is correctly identified as Class 6 within this category.

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. Bonuses can be reversionary (added to the sum assured and payable at death or maturity) or terminal (paid at the end of the policy term, often dependent on the policy’s performance and market conditions). The question tests the understanding of how these profits are distributed and the nature of the bonuses. Option A correctly identifies that bonuses are a distribution of profits and can be either reversionary or terminal. Option B is incorrect because while dividends are a form of profit distribution, the term ‘bonus’ is more specific to participating life insurance policies in Hong Kong. Option C is incorrect as the insurer’s solvency is a prerequisite for profit distribution, not the mechanism of bonus distribution itself. Option D is incorrect because while policy performance influences bonuses, it’s the distribution of profits, not a guarantee of fixed returns.

This question tests the understanding of an agent’s duty of care and skill. An agent is expected to exercise reasonable care and skill in performing their duties. While the law doesn’t demand perfection, a failure to meet this standard can lead to the principal reclaiming losses from the agent. In this scenario, the agent’s failure to renew the policy due to oversight, despite having the funds, demonstrates a lack of reasonable care and skill, making the principal liable for the loss caused by the lapse in coverage and allowing the principal to seek recourse from the agent.

The Personal Data (Privacy) Ordinance (PDPO) in Hong Kong is designed to protect the privacy of individuals by regulating the collection, holding, processing, and use of personal data. Its scope is not limited to either the public or private sector exclusively. Instead, it applies to any person or organization that collects, holds, or processes personal data, regardless of whether they are a government body, a statutory corporation, or a private enterprise. Therefore, both public and private sectors fall under the purview of the PDPO.

This question tests the understanding of how salvage value impacts the indemnity provided by an insurer. When damaged property has residual value, this value is factored into the calculation of the loss. The insurer can either deduct the salvage value from the payout, allowing the insured to retain the damaged item, or the insurer can take possession of the salvage and dispose of it, paying the full loss amount. Both methods ensure the insured is not compensated for more than their actual loss, adhering to the principle of indemnity.

The Insurance Authority (IA) and the Industry and Regulatory Bodies (IARB) assess whether an individual is ‘fit and proper’ to be registered as an insurance intermediary. A key aspect of this assessment involves reviewing their past conduct. Specifically, the regulatory framework requires an examination of whether the individual has previously been found to be in breach of the Code of Conduct or the rules of the Hong Kong Federation of Insurers (HKFI). This ensures that individuals with a history of non-compliance are identified and appropriately managed, maintaining the integrity of the insurance industry. While other factors like passing examinations and age are important, the direct question of past compliance breaches is a primary consideration for fitness and propriety.

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 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 scenario describes an insurance practitioner moving to a new company and taking copies of previous customers’ policy information. This action directly violates the principle of lawful and fair means of data collection and the prohibition against changing the purpose of data use. Specifically, using data collected for one purpose (servicing policies with the former employer) for a new purpose (marketing for the new employer) without consent is a breach. The Personal Data (Privacy) Ordinance (PDPO) and its associated codes of practice emphasize that personal data should only be used for the purpose for which it was collected, or for a directly related purpose, unless consent is obtained for other uses. Taking copies of customer information for personal gain and future marketing at a new firm is not a lawful or fair means of collection for the new employer and represents a change in the original purpose of data collection.

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 the 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, literal reading.

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 vigilant about suspicious circumstances, doubtful documentation, or verbal cues that suggest a claim is not legitimate. 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.