IIQE Paper 1 Principles and Practice of Insurance Examination Quiz 41

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. First, it must inform its relevant authority (RA) about this non-compliance. Second, and crucially, it must implement additional measures to effectively mitigate the Anti-Money Laundering/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 Insurance Ordinance (Cap. 41) mandates specific minimum paid-up capital requirements for insurers operating in Hong Kong. For an insurer conducting only general business or only long-term business, but not any statutory (compulsory) insurance business, the minimum paid-up capital is HK$10 million. If the insurer engages in any statutory (compulsory) insurance business, regardless of whether it also conducts other types of insurance business, the minimum paid-up capital requirement increases to HK$20 million. Therefore, an insurer solely focused on long-term business, without engaging in compulsory insurance, needs HK$10 million.

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’ when a separate investment department is absent. This responsibility is paramount for ensuring the insurer’s financial stability and growth, directly impacting its ability to meet obligations and maintain operations. The other options, while important, do not encompass the strategic financial management of the company’s investments as directly as the correct answer.

The scenario describes an insurance practitioner moving to a new company and taking copies of their former employer’s customer 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 existing policies with the former employer) for a new purpose (marketing for the new employer) without consent is a breach. The guidance note emphasizes that making copies of customer information from a former employer’s records when changing jobs is an example of improper data handling and collection for direct marketing purposes.

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 classes like Land Vehicles (Class 3), Railway Rolling Stock (Class 4), Aircraft (Class 5), Ships (Class 6), and Goods in Transit (Class 7). Therefore, Capital Redemption business is a specific classification within Long Term Business.

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 these criteria. According to the provided text, for the purposes of clause 22(b) of the Code of Practice, a ‘Group of Companies’ is defined by the relationship between holding and subsidiary companies, as per the Companies Ordinance. This definition is crucial for determining if individuals associated with different entities within a group are considered to be acting under a single umbrella for regulatory purposes, impacting their fitness and properness assessment. Therefore, understanding the definition of a ‘Group of Companies’ in this context is key to answering correctly.

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 and evaluating new insurance products or modifications to existing ones. This involves analyzing market trends, competitor offerings, and customer needs to ensure the insurer’s product portfolio remains competitive and relevant. Developing new forms of cover or enhancing existing ones, as described in the syllabus section (xv) Product Development, is directly driven by this research. Options B, C, and D describe related but distinct activities. While underwriting is crucial for assessing risk, it’s a post-product development function. Claims management deals with processing losses after they occur. Actuarial pricing sets the premium, which is informed by product research but is not the research itself.

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 and collectively underwrite these risks. The MIB, on the other hand, deals with compensation for victims of motor vehicle accidents when compulsory insurance is absent or ineffective, or the insurer is in liquidation. The HKFI’s mission is broader, focusing on promoting insurance and consumer confidence through ethical standards. The IARB is specifically for registering and handling complaints against insurance agents.

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 syllabus information, 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 text.

The question tests the understanding of how insurers might internally categorize their business operations for management and control. While the IIQE syllabus outlines statutory classes of business for authorization purposes (Classes 8-17), insurers have flexibility in their internal classification. Classifying by the source of business, such as through agents, brokers, or direct sales, is a common and practical method for managing distribution channels and performance. Classifying by the type of client (individual vs. commercial) is also a practical approach. However, classifying by the ‘subject matter of insurance’ is more aligned with academic or professional examination structures, not typically an internal operational classification for management purposes. Therefore, classifying by the source of business is a valid and common internal management practice.

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 the insurer in exchange for a premium. The other options represent ancillary benefits or broader economic impacts, not the fundamental role of insurance.

The core of underwriting in general insurance involves a continuous assessment of risks. Unlike life insurance, where underwriting is a singular event at policy inception, general insurance policies are subject to periodic review. This allows the insurer to adjust terms, premiums, or even decline renewal based on evolving risk profiles or claims experience. Therefore, the ability to modify or terminate coverage at renewal is a key characteristic that distinguishes general insurance underwriting from the more static nature of life insurance underwriting.

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 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 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 its condition immediately before the loss occurred. This can also result in a payout exceeding the depreciated value, as a new item replaces an old one. 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 at the time of loss. If the property is underinsured, the payout will be reduced proportionally, preventing a payout greater than indemnity.

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 aware of suspicious circumstances, doubtful documentation, or verbal cues that suggest a claim might be fraudulent. The key is to assist the insurer and the law in resisting and revealing fraud, but with sensitivity, as the insurer is primarily responsible for investigating and alleging fraud. Therefore, reporting suspicious claims to the insurer aligns with the intermediary’s ethical and legal obligations.

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 (e.g., a deductible or a limit on coverage), and the insured recovers an amount from a third party that exceeds the insurer’s payout, the insured is entitled to retain the portion of the recovery that covers their unreimbursed loss before the insurer receives any proceeds. This ensures the insured is made whole for their uninsured portion of the loss before the insurer benefits from the subrogation claim.

The scenario describes an insurance agent who, as an appointed agent, typically provides customer and transaction documentation directly to the insurer and does not maintain these records themselves. According to the Guideline, in such an arrangement, these individual agents are considered to have deposited the required records with the insurer. However, the agents remain responsible for ensuring compliance. This responsibility is met if the insurer has systems in place to comply with record-keeping requirements under the Anti-Money Laundering Ordinance (AMLO) and if these records are readily accessible to a relevant authority (RA) from the insurer. Therefore, the agent must ensure the insurer’s compliance and accessibility of records.

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 are designed to ensure competence and professionalism within the industry. One crucial aspect is the need for a minimum educational standard, which is Form 5 or its equivalent, and the applicant must be at least 21 years old. Furthermore, to engage in the long-term insurance broking business, including linked products, passing the Investment-linked Long Term Insurance Paper of the IIQE is generally required, unless specific exemptions apply. This ensures that individuals dealing with complex, long-term financial products possess the necessary knowledge and understanding.

This question tests the understanding of product development in the context of insurance. The scenario describes an insurer actively researching and creating new insurance products to remain competitive and relevant in the market. This aligns directly with the definition of ‘Product Research’ as monitoring and developing existing and new products to keep in line with trends and market competition, as outlined in section 4.1(c) of the IIQE syllabus. The other options are related but do not specifically describe the proactive development of new insurance offerings based on market dynamics.

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 (e.g., a deductible or a limit on coverage), and the insured later recovers funds from a third party responsible for the loss, the insurer is entitled to recover its payout. However, if the recovery from the third party is less than the total loss suffered by the insured, and the insurer’s payout was only partial, the insured may be entitled to a portion of the recovered funds. This is because the insurer’s subrogation right is limited to the amount it paid. If the recovery exceeds the insurer’s payout but not the total loss, the insurer gets its money back first, and any remaining amount goes to the insured to cover their unreimbursed loss. If the recovery is insufficient to fully indemnify both the insurer and the insured, the proceeds are typically shared, with the insured often having a prior claim to recover their unreimbursed portion of the loss before the insurer is made whole, depending on the specific policy wording and legal interpretation. In this scenario, the insurer paid HK$50,000 of a HK$100,000 loss, and the insured recovered HK$70,000 from the negligent party. The insurer’s subrogation right is limited to the HK$50,000 it paid. The insured’s unreimbursed loss is HK$50,000 (HK$100,000 – HK$50,000). Since the recovery of HK$70,000 is more than the insurer’s payout but less than the total loss, the insurer is entitled to its HK$50,000. The remaining HK$20,000 (HK$70,000 – HK$50,000) belongs to the insured, helping to offset their remaining uninsured loss. Therefore, the insurer can recover HK$50,000, and the insured can recover HK$20,000 from the third party’s payment.

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 thoroughly understanding the client’s situation and recommending a product that genuinely fits, rather than pushing a sale. Misrepresenting policy features or benefits, especially to encourage the replacement of existing policies to the client’s detriment, is a serious breach of conduct. Offering unauthorized rebates or incentives is also prohibited, as it can distort the client’s decision-making process and undermine fair market practices. The core principle is to act in the client’s best interest, ensuring transparency and suitability.

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 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 policy’s specific wording overrides this, making immediate disclosure mandatory. Failure to disclose this change constitutes a breach of the duty of utmost good faith.

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 these policies. These bonuses can be paid in various forms, such as cash, reversionary (added to the sum assured), or by reducing future premiums. Therefore, bonuses are the direct manifestation of profit sharing in participating policies.

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 the insured party, upon discovering a material omission at the proposal stage, decides to treat it as void. Option (b) describes an unenforceable contract, which is valid but cannot be enforced due to a procedural defect, not an inherent flaw at formation. Option (c) describes a void contract, which is invalid from the outset and has no legal effect. Option (d) describes a valid contract, which is fully enforceable by both parties.

The Code of Practice for the Administration of Insurance Agents, issued by the HKFI with the approval of the Insurance Authority, defines an ‘Insurance Agent’ 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 Responsible Officers and Technical Representatives from this primary definition of an ‘Insurance Agent’ for the purposes of the Code. Therefore, while Responsible Officers and Technical Representatives are crucial roles within the insurance agency structure and are subject to registration and conduct requirements under the Code, they are not themselves classified as ‘Insurance Agents’ in the fundamental definition provided.

A contract is fundamentally a legally binding agreement. While many agreements exist in daily life, not all are intended to have legal consequences. Social arrangements, like a lunch appointment, are generally not considered contracts because the parties do not intend to create legal obligations. The core of a contract lies in promises exchanged between parties, where a breach of these promises can lead to legal recourse. An insurance policy itself is not the contract but rather the written evidence of the contract that has been formed.

The Insurance Ordinance mandates that authorized insurers maintain adequate reinsurance arrangements. This is a crucial aspect of financial supervision, focusing on both the quantity and the collectability of reinsurance. The IA’s Guideline on Reinsurance with Related Companies specifically addresses concerns that prudent control over reinsurance might be compromised when an insurer reinsures with a related entity. This guideline aims to ensure that such arrangements do not put the insuring public at risk by defining what the IA considers adequate and outlining supervisory actions if adequacy is not met. Therefore, the primary objective of this guideline is to safeguard the financial security of the insurer and, by extension, the policyholders, by ensuring that reinsurance arrangements, especially with related parties, are robust and properly managed.

An insurance broker, by holding themselves out as an expert, owes a higher duty of care to their clients. This means they must exercise reasonable skill and diligence in advising clients, and failure to do so, resulting in financial loss for the client, can constitute professional negligence. This negligence can lead to legal liability, making professional indemnity insurance a crucial safeguard for brokers. An insurance agent, on the other hand, typically acts as a representative of the insurer, and their duty of care to the policyholder is generally considered lower unless they profess specialized skills. Consequently, agents are not statutorily mandated to carry professional indemnity insurance, unlike brokers.

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.

Subrogation is the insurer’s right to step into the shoes of the insured and pursue recovery from a third party responsible for the loss, but only to the extent of the indemnity paid. If the insurer has only partially indemnified the insured due to policy limitations (e.g., a deductible or a specific policy limit that is less than the total loss), the insured retains their right to recover the remaining portion of the loss from the third party. The insurer’s subrogation rights are limited to the amount they have paid. Therefore, if the insured recovers more from the third party than the insurer’s payout, the excess belongs to the insured. This principle prevents the insured from being overcompensated for the same loss.