IIQE Paper 1 Principles and Practice of Insurance Examination Quiz 40

The Independent Commission Against Corruption (ICAC) in Hong Kong provides proactive corruption prevention services. These services include developing ‘Best Practice Packages’ which offer practical guidelines for both public and private sectors to identify and mitigate corruption risks. The ICAC also offers confidential advice and tailored training programs, specifically mentioning anti-corruption training for the insurance industry. The ‘Practical Guide on Professional Ethics for Life Insurance Intermediaries,’ developed in collaboration with the Insurance Authority and industry bodies, aims to enhance ethical conduct and reduce regulatory violations. Therefore, engaging with these ICAC resources is a key strategy for insurance intermediaries to uphold ethical standards and prevent corrupt practices.

This question tests the understanding of voidable contracts within the context of insurance. A voidable contract is one that can be nullified by one party due to a defect present at its inception. In insurance, this often arises from misrepresentation or non-disclosure of material facts during the proposal stage. The scenario describes a situation where the insured failed to disclose a pre-existing medical condition. This omission is a material fact that, if known to the insurer, would likely have influenced their decision to offer coverage or the terms thereof. According to contract law principles applicable to insurance, such a non-disclosure renders the contract voidable at the insurer’s option. The insurer can choose to repudiate the contract, effectively treating it as if it never existed from the beginning, provided they act within a reasonable time after discovering the misrepresentation. Options B, C, and D describe different contract statuses: an unenforceable contract cannot be enforced due to a procedural defect (like missing stamp duty), a void contract is invalid from the outset (e.g., for an illegal purpose), and a valid contract is fully binding. None of these accurately describe the situation where a contract can be nullified due to a material omission by one party.

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.

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 distinct powers, and the custody of assets by a trustee is a measure for additional security, not a direct limitation on premium income.

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 when advising clients. Failure to do so, leading to a client’s loss, can constitute professional negligence. Unlike insurance agents, who primarily represent the insurer and may not profess the same level of specialized expertise to the policyholder, brokers are expected to act in the policyholder’s best interest and provide impartial advice. Consequently, brokers are typically required to maintain Professional Indemnity Insurance to cover potential claims arising from such negligence, whereas this is not a statutory requirement for insurance agents.

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. If a material fact, such as the contraction of malaria, is discovered after the policy has been accepted but before it commences, and the policy terms are silent on this specific point, the proposer is not obligated to disclose it at common law. However, insurers typically include policy wordings that exclude pre-existing conditions, allowing them to deny claims based on that exclusion rather than a breach of utmost good faith.

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 ethical conduct are also important, the IIQE qualification is a direct measure of technical suitability.

The Insurance Ordinance (Cap. 41) in Hong Kong categorizes insurance business into two primary divisions: General Business and Long Term Business. General Business encompasses a wide array of non-life insurance products, such as property damage, motor, and liability insurance. Long Term Business, conversely, deals with insurance contracts that are expected to remain in force for extended periods, typically involving life insurance, annuities, and permanent health insurance. The distinction is crucial for regulatory purposes, including capital requirements and solvency margins, as outlined in the Insurance Ordinance.

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 it paid out in indemnity. Therefore, if an insurer pays HK$50,000 for a loss caused by a negligent third party, and the insured also recovers HK$20,000 from a separate source (like a salvage sale), the insurer can only claim HK$50,000 from the third party, not the full loss amount if it exceeds the indemnity paid. The insured cannot benefit twice from the same loss.

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. Furthermore, it can refer these matters for investigation, receive reports, and mandate disciplinary actions. Crucially, the IARB is empowered to register or revoke the registration of Insurance Agents, Responsible Officers, and Technical Representatives. It also has the responsibility to report breaches of the Insurance Ordinance or the Code to the Insurance Authority (IA) if a registered person is deemed unfit to continue their registration. Therefore, the IARB’s functions encompass oversight, investigation, disciplinary action, and regulatory reporting, all aimed at ensuring the integrity of the insurance intermediary sector.

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.

Terrorist financing, as defined by relevant legislation, involves the provision or collection of property with the intention or knowledge that it will be used to commit terrorist acts. This includes not only direct funding but also making property or services available to individuals known or suspected to be terrorists or terrorist associates. The key element is the intent or knowledge regarding the ultimate use of the funds or services for terrorist purposes, regardless of whether the act is ultimately carried out. Option (b) describes making property or services available to a known or suspected terrorist, which is a form of terrorist financing. Option (c) focuses on the collection or solicitation of funds for a known or suspected terrorist, also a form of terrorist financing. Option (d) is incorrect because it describes the legitimate use of insurance for investment purposes without any connection to terrorist activities.

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 at maturity or death) or cash bonuses (paid out directly). The consideration for these bonuses is the additional premium paid by the policyholder, which contributes to the insurer’s profit pool. Therefore, the fundamental consideration for receiving bonuses in a participating policy is the policyholder’s contribution to the insurer’s profits through these higher premiums.

The question tests the understanding of the essential elements required for a legally binding simple contract, as per Hong Kong contract law principles relevant to the IIQE syllabus. A valid simple contract typically requires an offer, acceptance of that offer, consideration (something of value exchanged between parties), and the legal capacity of the parties to enter into such an agreement. All four elements are fundamental for a contract to be enforceable. Option (a) is incorrect because it omits consideration and capacity. Option (b) is incorrect as it omits acceptance and capacity. Option (c) is incorrect because it omits offer and capacity. Therefore, all four elements are necessary.

The scenario describes a situation where a customer is seeking clarification on policy terms and requesting a duplicate document. According to the provided syllabus, the Customer Servicing department is responsible for handling various types of enquiries, including those seeking guidance and information, as well as requests for documentation like duplicate policies. While public relations and marketing are also mentioned, they are distinct functions. Complaints handling is a separate, though related, responsibility. Therefore, the primary responsibility for addressing both the customer’s query about policy terms and the request for a duplicate policy falls under the Customer Servicing department’s purview.

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 oversight by the IA, focusing on both the quantity and collectability of the reinsurance. The IA has specific guidelines, particularly for reinsurance with related companies, to mitigate potential conflicts of interest and protect policyholders. Therefore, ensuring the adequacy and quality of reinsurance is a fundamental requirement for an insurer’s financial stability and compliance.

An insurance broker has a fundamental duty to act in the best interests of their clients. This principle, often referred to as placing client interests above all other considerations, dictates that the broker’s advice and actions should prioritize the client’s needs and financial well-being. 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 find 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, maintaining independence and offering a broad range of options are crucial aspects of fulfilling this fiduciary responsibility.

The question tests the understanding of the role of approved bodies of insurance brokers as defined by Hong Kong regulations. Section 70 of the Insurance Ordinance empowers the Insurance Authority to approve associations of insurance brokers. These approved bodies, such as the Hong Kong Confederation of Insurance Brokers and the Professional Insurance Brokers Association Limited, play a crucial role in self-regulation and upholding professional standards within the brokerage sector. The other options describe different aspects of insurance operations or regulatory bodies not directly related to the specific function of approved broker associations under Section 70.

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. 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, as the failure to disclose was not fraudulent but still a breach of the duty of utmost good faith. Option B describes ordinary good faith, which is a lower standard. Option C describes fraud, which involves intentional deception. Option D describes a policy condition, which is a term within the policy, not a breach of good faith.

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 ordinary good faith, which only requires truthful answers to specific questions, not proactive disclosure of all material facts. Option C describes the role of an obligee in a suretyship, which is unrelated to disclosure duties in insurance contracts. Option D defines a performance bond, which is a type of guarantee and not relevant to the concept of non-disclosure.

Under the Personal Data (Privacy) Ordinance (PDPO), when a data user intends to use personal data for direct marketing for the first time, they must inform the data subject of their opt-out right. This notification is a crucial step to ensure data subjects are aware of their rights and can control how their data is used for marketing purposes. The ordinance specifies penalties for contraventions, highlighting the importance of this procedural requirement. The other options are incorrect because while providing prescribed information is necessary, the specific requirement for the first-time use notification of the opt-out right is distinct. Furthermore, the grandfathering arrangement applies to pre-existing data usage, not new direct marketing activities. The requirement for written consent or no objection is for the provision of data to others or for gain, not necessarily for the initial use for one’s own direct marketing if the opt-out right is clearly communicated.

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 inflows and outflows. Determining the insurability of a risk falls under the purview of underwriting, which involves assessing and evaluating potential risks to decide whether to accept them and on what terms. Arranging the launch of a new policy product is a strategic and marketing function, typically handled by product development, marketing, or actuarial departments, not the accounts department. Therefore, (iii) and (iv) are the functions least likely to be the responsibility of the Accounts department.

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 aware of how and where to lodge a complaint.

The core principle here is that financial institutions (FIs) must establish robust internal controls to prevent employees from “tipping off” customers or others about suspicious activity investigations. This involves training staff to recognize unusual transactions by understanding normal customer behavior and transaction patterns. When a suspicion of money laundering or terrorist financing (ML/TF) arises, the FI must be mindful of the risk of tipping off during the Customer Due Diligence (CDD) process. The guideline emphasizes that FIs should ensure their staff, including appointed insurance agents, are adequately trained on their roles in AML/CFT, understand what constitutes suspicious activity, and know how to report it internally. This training needs to be ongoing and tailored to the FI’s specific risks and operations. Therefore, the most comprehensive approach to preventing tipping off involves a combination of strong internal controls, thorough staff training on recognizing suspicious activities and the risks of tipping off, and careful execution of CDD procedures.

Guidance Note 6 (GN6) clarifies that an insurance agent, Responsible Officer, or Technical Representative cannot solicit or conduct insurance business on behalf of a principal until the Insurance Authority Registration Board (IARB) formally confirms their registration in writing via a Notice of Confirmation of Registration. Acting or holding oneself out as an agent before this confirmation is an offense under Section 77 of the Insurance Ordinance, potentially leading to criminal prosecution. Similarly, a Responsible Officer or Technical Representative cannot act in their capacity before their registration is confirmed, as this could impact their fitness and properness.

The question tests the understanding of ‘Renewal’ in the context of insurance contracts. Renewal, as defined in the syllabus, is the continuation of an insurance contract for a further period, which legally constitutes a new contract. This means that upon renewal, the terms and conditions of the policy are effectively re-established for the new period, rather than simply extending the existing one. Options B, C, and D describe different concepts: ‘Replacement’ refers to providing a substitute item, ‘Risk Transfer’ is about shifting the burden of risk to another party, and ‘Salvage’ relates to recovering value from damaged property.

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

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 principles, 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 occur even if the contract has a fixed duration. The scenario describes a principal appointing a second agent while an exclusive agency agreement is still in effect, which constitutes a fundamental breach of the exclusivity clause. The agent, upon discovering this, can cease performing their duties and seek compensation for the loss of expected profits for the remaining term of the agreement. This aligns with the concept of termination for breach of contract in agency relationships.

The Insurance Ordinance (Cap. 41) in Hong Kong categorizes insurance business into two primary segments: General Business and Long Term Business. General Business encompasses a wide array of non-life insurance products, such as property, casualty, and marine insurance. Long Term Business, conversely, deals with insurance contracts that are expected to remain in force for extended periods, typically involving life insurance, annuities, and permanent health insurance. The distinction is crucial for regulatory purposes, including capital requirements and solvency margins, as the risk profiles and operational characteristics of these two categories differ significantly. Therefore, ‘Long Term Business’ is the correct counterpart to ‘General Business’ as defined by the Ordinance.

The question tests the understanding of the minimum net asset requirements for different types of insurance brokers in Hong Kong, as stipulated by relevant regulations. An unincorporated insurance broker is required to maintain a minimum net asset value of HK$100,000 at all times. An incorporated insurance broker has a dual requirement: a minimum net asset value of HK$100,000 and a minimum paid-up share capital of HK$100,000. The question specifically asks about an incorporated insurance broker, making the HK$100,000 paid-up share capital a crucial component of the correct answer.