IIQE Paper 1 Principles and Practice of Insurance Examination Quiz 44

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 renewal process is initiated within a reasonable timeframe, allowing for necessary checks and compliance with continuing professional development requirements, without being too close to the expiry date which could lead to lapses in 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 duty of utmost good faith, which includes the duty of disclosure, generally applies to material facts known to the proposer before the contract is concluded. However, this duty can be extended or modified by the policy terms. In this scenario, the policy explicitly requires disclosure of material changes in risk during the policy’s term. A change in the insured’s occupation, especially if it increases the risk, falls under this requirement. While at common law such a change might only need to be disclosed at renewal, the specific policy wording overrides this, making immediate disclosure mandatory. Failure to disclose this change constitutes a breach of utmost good faith.

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 payout on a large policy, which directly aligns with the definition of outward reinsurance.

A registered person selling long-term insurance must make reasonable efforts to ensure the policy aligns with the client’s disclosed needs and financial capacity. This includes understanding the client’s situation and recommending a suitable product, rather than pushing any product. The other options describe actions that are either not explicitly required or are potentially misleading. Offering a rebate not specified in the policy is prohibited, and while explaining differences is important, it’s secondary to suitability. Simply providing illustrations without considering suitability is insufficient.

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 has been interpreted by courts to broaden the exclusion beyond just proximate causes. In the provided scenario, the war was an indirect cause of the officer’s death, but the ‘directly or indirectly’ wording meant the insurer could deny the claim because the war was a contributing factor, even if remote. Therefore, the insurer’s denial is consistent with this interpretation of the policy wording.

The Insurance Ordinance in Hong Kong categorizes insurance business into Long Term Business and General Business. Long Term Business is further subdivided into nine 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 seventeen classes, starting with Accident (Class 1) and Sickness (Class 2), followed by property insurance for Land Vehicles (Class 3), Railway Rolling Stock (Class 4), Aircraft (Class 5), Ships (Class 6), and Goods in Transit (Class 7). Therefore, a contract providing benefits payable upon the birth of a child falls under the statutory classification of Long Term Business, specifically Class B.

This question tests the understanding of non-fraudulent non-disclosure, which is a breach of the duty of utmost good faith. This occurs when a party, without intent to deceive, fails to reveal material facts to another party. In the context of insurance, the insured has a duty to disclose all material facts to the insurer. Failing to do so, even if unintentionally or due to negligence, can invalidate the policy. Option B describes a situation where a party deliberately conceals information, which is fraudulent non-disclosure. Option C refers to a breach of ordinary good faith, which typically involves lying or deliberate misleading, not necessarily the failure to disclose all facts. Option D describes a situation where an insurer fails to pay a claim, which is a separate issue related to claim settlement, not disclosure obligations.

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 at least seven years is a crucial aspect of regulatory compliance, ensuring accountability and the ability to investigate past activities if necessary.

The scenario describes a Registered Person (RP) who has failed to submit proof of their Continuing Professional Development (CPD) hours when requested by the Insurance Authority (IA). According to the provided information, 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 such a request.

The Insurance Authority (IA) mandates that insurance brokers must submit annual audited financial statements and an auditor’s report within six months of their financial year-end. This auditor’s report specifically confirms adherence to minimum regulatory requirements, including those related to financial soundness and operational capabilities. While a broker must disclose their registration number upon request and on business cards, and provide a Customer Protection Declaration for new long-term policies, these are distinct obligations from the annual financial reporting and auditor’s confirmation of compliance with minimum requirements.

This question tests the understanding of how proximate cause applies when multiple perils are involved in a loss, specifically when an uninsured peril leads to an insured peril. According to the principles of proximate cause, if an uninsured peril (like negligence) directly causes an insured peril (like fire), and the loss results from that insured peril, the loss is generally recoverable. In this scenario, the master’s negligence (uninsured peril) caused a collision, which in turn caused a fire (insured peril). The subsequent explosion and water damage, while stemming from the fire, are considered consequences of the insured peril. Therefore, the loss due to water damage is recoverable under the policy that covers fire, as fire is the proximate cause that led to the chain of events resulting in the damage.

The Insurance Authority (IA) mandates specific minimum requirements for individuals seeking to operate as insurance brokers or to be appointed as Chief Executives of insurance broking firms. These requirements encompass qualifications, experience, financial stability (capital and net assets), professional indemnity insurance, and proper client fund management. Furthermore, the IA assesses the ‘fit and proper’ status of applicants. For bodies of insurance brokers, the IA requires them to have adequate rules and regulations to ensure their members meet these standards. Option (a) correctly identifies that meeting these IA-specified minimum requirements is a prerequisite for authorization.

This question tests the understanding of how a Hong Kong-incorporated Financial Institution (FI) should manage Anti-Money Laundering and Counter-Terrorist Financing (AML/CFT) compliance for its overseas operations when local laws prevent full adherence to Hong Kong’s requirements. According to the provided text, if an overseas branch or subsidiary cannot comply with requirements similar to Hong Kong’s Parts 2 and 3 of Schedule 2 due to local legal restrictions, the FI has two primary obligations. First, it must inform its relevant Hong Kong regulator (RA) about this inability to comply. Second, it must implement additional measures to effectively mitigate the specific money laundering/terrorist financing (ML/TF) risks that arise from this non-compliance. This ensures that even with local legal constraints, the FI actively manages the heightened risks.

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 defined as a situation where there is only the possibility of loss or no loss, with no chance of financial gain. Examples include damage to property from fire or natural disasters. A ‘speculative risk’, on the other hand, involves the possibility of both gain and loss, such as investing in the stock market or gambling. A ‘particular risk’ is one that affects only an individual or a small group, while a ‘fundamental risk’ affects a large segment of society or the entire economy, like inflation or war. Therefore, a risk that presents only the potential for loss, without any possibility of a positive outcome, is classified as a pure risk.

This question tests the understanding of subrogation, specifically how it operates when an insurer has only partially indemnified a loss due to policy limitations. Subrogation allows an insurer to step into the shoes of the insured to recover from a third party responsible for the loss. However, the insurer’s recovery is generally limited to the amount they have paid. If the insurer paid less than the full loss (e.g., due to a deductible or a policy limit), and the insured also suffered an unreimbursed portion of the loss, the insured retains a proportionate interest in any recovery from the third party. This ensures the insured is not unjustly enriched by the subrogation recovery and that the insurer does not recover more than its payout. Therefore, if the insurer paid only a portion of the loss, and the insured also bore a portion, the insured is entitled to a share of the subrogation proceeds corresponding to their unreimbursed loss.

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 causing the damage ultimately bears the cost. The insurer’s right to subrogation is limited to the amount they have paid out as indemnity, meaning they cannot profit from the recovery. While subrogation can arise from various legal bases like tort or contract, its core function is to transfer the insured’s recovery rights to the insurer.

A contract is fundamentally a legally binding agreement. While many agreements exist in daily life, not all are intended to have legal consequences, such as a casual social arrangement. The core of a contract involves promises or undertakings exchanged between parties. An insurance policy itself is not the contract but rather the documented evidence of the contract. The validity of a contract hinges on the presence of essential elements, and if any are missing, the agreement may be considered void or defective, meaning it lacks legal effect. Therefore, the most accurate and encompassing definition of a contract is a legally enforceable agreement.

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.

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, questionable documentation, or verbal cues that suggest a claim may be fraudulent. The intermediary’s role is to support the insurer and the law in combating fraud, but it’s crucial to act with sensitivity and avoid making direct accusations of fraud, as that is the insurer’s primary responsibility. Therefore, reporting suspicious claims to the insurer aligns with the intermediary’s ethical and legal obligations.

The principle of legality is a fundamental requirement for any contract to be legally binding. This means that the purpose and subject matter of the agreement must not be against any existing laws or public policy. If a contract’s objective is illegal, such as an agreement to commit a crime or to engage in activities prohibited by statute, it is considered void and unenforceable from the outset. While other factors like consideration and capacity are crucial, the legality of the contract’s purpose is a prerequisite for its validity. Therefore, an agreement to perform an unlawful act would render the entire contract invalid.

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 must be renewed not earlier than three months before its expiry. This ensures that the renewal process is initiated within a timely manner, allowing for the continued validity of their appointment and adherence to regulatory requirements. Options B, C, and D suggest periods that are either too early or too late, potentially leading to lapses in registration or unnecessary administrative burdens.

The principle of utmost good faith in insurance mandates that all material facts be disclosed by the proposer to the insurer. A material fact is defined as any circumstance that would influence a prudent insurer’s judgment in deciding whether to accept the risk or in setting the premium. While the 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 presence of an automatic sprinkler system reduces the risk of fire, 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. Therefore, commencing insurance operations without this prior authorization is a violation of the regulatory framework.

This question tests the understanding of ‘Non-fraudulent Non-Disclosure’ within the context of the duty of utmost good faith in insurance contracts. Non-fraudulent non-disclosure occurs when a party, without intent to deceive, fails to reveal material facts. This is distinct from ordinary good faith, which only requires truthful answers to direct questions. The scenario describes an applicant failing to mention a pre-existing condition that, while not intentionally hidden, is material to the risk. This aligns with the definition of non-fraudulent non-disclosure, which is a breach of utmost good faith. Option B describes ordinary good faith, which is a lower standard. Option C describes fraud, which implies intent to deceive. Option D describes a policy condition, which is a contractual term, not a breach of good faith.

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, operating an insurance business without this prior authorization from the IA is a violation of the regulatory framework.

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.

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. Therefore, implementing robust internal policies and conducting regular audits of the data processor’s practices, even without a specific contractual clause for each point, can be considered an ‘other means’ of ensuring compliance with data protection requirements.

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, such as Accident, Sickness, Land Vehicles, Railway Rolling Stock, Aircraft, Ships, and Goods in Transit. Class F, Capital Redemption, is specifically defined as a contract to provide a capital sum at the end of a term to replace capital, and it is explicitly stated as not being related to human life. Therefore, a contract designed to provide a lump sum at a future date to repay a loan, without any connection to mortality or morbidity, falls under this classification.

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 only deals with reinsurance, which is a specific segment of the insurance market.