IIQE Paper 1 Principles and Practice of Insurance Examination Quiz 46

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 company’s monetary assets and liabilities. Options (i) and (ii) both fall directly within the purview of financial management and are typical duties of an Accounts department. Conversely, determining the insurability of a risk (iii) is the responsibility of the Underwriting department, which assesses the likelihood and severity of potential losses. Arranging the launch of a new policy product (iv) is a function of the Product Development or Marketing departments, involving market research, product design, and promotional strategies. Therefore, (iii) and (iv) are the tasks least likely to be handled by the 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 relates to the requirement of providing competent advice, which is a fundamental aspect of professional conduct in the insurance industry. Options B, C, and D describe actions that are either not explicitly required in this context or are secondary to the primary duty of providing competent advice.

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, they need to detail all dealings with insurers, clients, and the broker themselves, as well as all income and expenses, and the broker’s assets and liabilities. The requirement to retain these records for a minimum of seven years is a crucial aspect of regulatory compliance, ensuring accountability and the ability to investigate past activities if necessary. Therefore, the primary purpose of these record-keeping requirements is to ensure transparency, financial integrity, and auditability of the broker’s operations.

The Insurance Authority (IA) Code of Conduct outlines the criteria for determining if an individual is fit and proper to be registered. Clause 6/31 (ix) specifically states that a person must have passed the relevant papers of the Insurance Intermediaries Qualifying Examination (IIQE) recognized by the IA, unless exempted. This demonstrates a fundamental requirement for demonstrating competence and knowledge in the insurance field, which is a key aspect of being fit and proper. While other factors like compliance history and age are important, the IIQE qualification is a direct measure of the necessary knowledge base.

Terrorist financing, as defined by relevant legislation, involves the provision or collection of property with the intention or knowledge that it will be used, in whole or in part, to commit terrorist acts. This can occur even if the property is not ultimately used for such purposes. Option (b) describes making property or services available to a known or recklessly considered terrorist or associate, which is also a form of terrorist financing. Option (c) focuses on the collection or solicitation of property for the benefit of a terrorist or associate, which is a component of terrorist financing. However, the most comprehensive definition encompasses the intent or knowledge of use for terrorist acts, regardless of whether the property is actually used. Therefore, the core of terrorist financing is the intent behind the provision or collection of funds for terrorist activities.

The core principle here is that Financial Institutions (FIs) must establish robust internal controls to prevent employees from inadvertently or intentionally revealing information that could alert a customer or another party that their activities are under scrutiny for potential money laundering or terrorist financing (ML/TF). This includes training staff to conduct customer inquiries in a manner that does not suggest suspicion. The Guideline emphasizes proactive identification of unusual activities by understanding customer behavior and transaction patterns. Therefore, an FI must ensure its staff, including appointed insurance agents, are equipped with the knowledge and sensitivity to recognize and report suspicious activities without tipping off the involved parties. This involves comprehensive training and clear policies on handling potentially suspicious transactions during the Customer Due Diligence (CDD) process.

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.

The question tests the understanding of the primary function of insurance as a risk transfer mechanism. While insurance does contribute to employment, financial services, and economic development, its core purpose is to shift the potential financial burden of a loss from an individual or entity to an insurer in exchange for a premium. The other options represent ancillary benefits or broader economic impacts, not the fundamental role of insurance.

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 by principals or registered persons, receive investigation reports, and require disciplinary action. Furthermore, the IARB is responsible for registering and revoking the registration of Insurance Agents, Responsible Officers, and Technical Representatives. Finally, it has the power 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.

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 mandates that authorized insurers maintain adequate reinsurance arrangements. This is a critical component of an insurer’s financial security and is subject to supervisory review by the IA regarding both the quantity and the collectability of the reinsurance. The Guideline on Reinsurance with Related Companies specifically addresses situations where an insurer reinsures with a related entity, aiming to ensure that the insurer’s prudent control over its reinsurance is not compromised, thereby safeguarding the interests of the insuring public. Therefore, the IA’s assessment of reinsurance adequacy, particularly with related parties, is a key aspect of its supervisory function to ensure financial stability.

The question tests the understanding of market concentration in Hong Kong’s insurance sector, specifically differentiating between General Business and Long Term Business. The provided text indicates that in General Business, the top ten insurers held a 42% market share, and no single insurer exceeded 17% in any major class. This suggests a more fragmented market. In contrast, for Long Term Business, the top ten insurers held 75%, the top five held 55%, and the top one held 16%. This significant concentration, particularly the top five and top one’s shares, points to a less evenly distributed market compared to General Business. Therefore, General Business is considered more evenly distributed among authorized insurers.

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 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 lawful and fair means of data collection and the prohibition against changing the purpose of data use. The Personal Data (Privacy) Ordinance, particularly Data Protection Principle 1 and the guidance on direct marketing, emphasizes that personal data should only be collected for specified purposes and not used for new purposes without consent. Copying customer data from a previous employer for use at a new one constitutes a misuse of data and a breach of privacy principles, as the original collection purpose was tied to the former employer’s services, not the new one’s.

A contract is fundamentally a legally enforceable agreement. While many agreements exist in daily life, such as social arrangements like a lunch appointment, they are not typically considered contracts because they are not intended to have legal consequences. If one party cancels, the other cannot pursue legal action. Contracts, in contrast, involve promises or undertakings exchanged between parties, with the expectation that these promises will be honored. The insurance policy itself is not the contract but rather the written evidence of the contract. The core concept is the legally binding nature of the agreement.

The Insurance Authority (IA) has the power to intervene in an insurer’s operations to protect policyholders. One such power, as outlined in the provided text, is the limitation of premium income. This measure can be implemented if the IA believes an insurer is expanding too rapidly, potentially leading to difficulties in managing the liabilities associated with new business. The other options, while related to regulatory actions, are not the specific intervention power described in this context. Restrictions on investments and new business are separate powers, and the custody of assets by a trustee is a measure for additional security, not a direct intervention to limit growth.

The question tests the understanding of how policy wording can modify the application of proximate cause. The phrase ‘directly or indirectly’ in an exclusion clause, as illustrated by the court case involving the army officer, broadens the scope of the exclusion. It means that even if the excluded peril (war) was only a remote or indirect cause of the loss (death by train), the exclusion still applies. Therefore, the insurer would not be liable for the loss. Option B is incorrect because ‘directly caused by’ is generally interpreted to mean proximate cause, not a broader scope. Option C is incorrect because ‘loss caused by’ is also typically interpreted as proximate cause. Option D is incorrect because while delay can be an issue, the specific wording ‘directly or indirectly’ is key to the broader exclusion in this scenario, and the question focuses on the interpretation of that phrase in relation to proximate cause.

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 Companies Ordinance (Cap. 41) and its subsequent amendments, along with the Insurance (General Provisions) Regulation, govern the operations of insurance companies in Hong Kong. Product development is a continuous and essential function for insurers to remain competitive, adapt to market changes, and meet evolving customer needs. It is not a one-time event, nor is it rendered unnecessary by compulsory classes of business or the finalization of policy wording. A large insurer, like any other, must innovate to maintain its market position and relevance. Therefore, product development is an ongoing process.

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.

Participating policies, also known as with-profit policies, offer policyholders a share in the insurer’s profits. These profits are typically distributed in the form of bonuses, which can be reversionary (added to the sum assured and payable on death or maturity) or cash bonuses (paid out directly). The consideration for these bonuses is the additional premium paid by the policyholder for the profit-sharing feature. Non-participating policies do not offer this profit-sharing mechanism and are generally cheaper as they do not include the cost of potential bonus distributions.

The Conduct of Insurance Agents for General Insurance Business and Restricted Scope Travel Business mandates specific professional behaviours. Agents are required to only offer advice within their areas of expertise, ensuring they possess the necessary knowledge and qualifications. It is fundamental for an agent to clearly identify themselves and their affiliation before engaging in any business discussions with a potential client. When comparing different insurance policies, agents must meticulously explain the distinctions in coverage, terms, and conditions to avoid misleading the client. Furthermore, a core responsibility is to clearly articulate the policy’s coverage and ensure the client comprehends the benefits and limitations of the product they are purchasing. Therefore, all four listed points are essential components of the conduct expected of insurance agents.

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.

Subrogation 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 principle is rooted in the concept of indemnity, ensuring the insured is made whole and preventing unjust enrichment. The insurer’s recovery under subrogation is limited to the amount they paid out as indemnity. Option B is incorrect because while subrogation can arise from tort, it’s not exclusively limited to it. Option C is incorrect as the insurer’s right to subrogation is not dependent on the insured’s willingness to pursue the claim; it’s the insurer’s right to pursue it themselves. Option D is incorrect because the insurer can recover more than the policy’s sum insured if the third party’s liability exceeds the indemnity paid, but the insurer’s own recovery is capped at the indemnity amount.

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, the insurer pays the agreed value, which might be higher than the market value at the time of loss, again exceeding strict indemnity. 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 lead to a payout exceeding the depreciated value. The condition of average, conversely, is a condition that limits the payout to the proportion that the sum insured bears to the actual value of the property. If the sum insured is less than the value of the property, the payout is reduced proportionally, preventing over-indemnity. Therefore, ‘New for Old’ cover, Agreed value policies, and Reinstatement insurances are the provisions that can result in more than indemnity being payable.

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 crucial for the insurer’s solvency and operational continuity. The other options represent important but distinct accounting functions that do not directly encompass the strategic management of company investments.

This question tests the understanding of the fundamental difference in the nature of underwriting between life insurance and general insurance. In life insurance, underwriting is a singular, critical event because the insurer cannot unilaterally alter or cancel the policy once issued. Any changes require the policyholder’s consent. This permanence necessitates a thorough and often centralized underwriting process to accurately assess risk at inception. Conversely, general insurance policies are typically subject to renewal, allowing the insurer to re-evaluate the risk and adjust terms or even decline renewal based on performance or changing circumstances. This inherent flexibility in general insurance makes a less centralized underwriting approach more feasible, as errors or evolving risks can be managed at renewal.

The question tests the understanding of the renewal period for an Officer/Technical Representative’s registration. According to the provided syllabus, the registration for an Officer/Technical Representative can be renewed not earlier than three months before its current expiry. This ensures that the registered person has sufficient time to complete any required Continuing Professional Development (CPD) and meet the ‘fit and proper’ criteria before the current registration lapses, maintaining compliance with regulatory requirements.

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 scenario describes a situation where a company is sharing customer data with a third-party marketing firm for promotional purposes. According to the PDPO, the original data user must inform the data subject about the types of data being shared, the marketing categories, and importantly, that the data is being provided to another entity for direct marketing, and whether this is for gain. Option A correctly identifies the need to inform about the provision for gain and the marketing categories, which are key requirements.

The principle of legality in contract law dictates that an agreement must not be contrary to any aspect of the law to be enforceable. If a contract’s purpose or performance involves illegal activities or contravenes public policy, it is considered void and unenforceable. In this scenario, a contract to facilitate illegal gambling directly violates Hong Kong laws prohibiting such activities. Therefore, the agreement would be deemed unenforceable due to its illegal nature, regardless of whether the parties intended to fulfill their obligations.