IIQE Paper 1 Principles and Practice of Insurance Examination Quiz 39

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, 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 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 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, such as Accident, Sickness, Land Vehicles, Railway Rolling Stock, Aircraft, Ships, and Goods in Transit. Therefore, a contract providing a capital sum at the end of a term to replace capital, irrespective of human life, falls under the Capital Redemption class (Class F) within the Long Term Business category.

The ‘single article limit’ in a household contents policy is a clause designed to manage the insurer’s risk when a single, highly valuable item constitutes a disproportionately large portion of the total sum insured for all contents. If such an item is not specifically declared and insured for its individual value, the policy will cap the payout for that item to a predetermined amount, regardless of its actual market value at the time of loss. This prevents a situation where a single claim for one item could exhaust the entire sum insured for all contents, which is a significant risk for the insurer, particularly concerning theft. The other options describe different policy features: ‘reinstatement insurance’ and ‘new for old’ cover relate to how claims are settled without deductions for wear and tear, while ‘section limits’ apply to distinct sections within a policy covering different types of risks or subject matter.

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 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 their personal data. This legislation applies broadly across both the public and private sectors, encompassing any entity that handles personal data. Therefore, neither sector is exempt from its provisions.

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, questionable documentation, or verbal cues that suggest a claim might be fraudulent. 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. Option (a) correctly identifies the intermediary’s obligation to report suspicious claims. Option (b) is incorrect because while an intermediary should be diligent, their primary role isn’t to conduct independent investigations like a detective. Option (c) is incorrect as the intermediary’s duty is to report suspicions to the insurer, not to directly confront the claimant about potential fraud. Option (d) is incorrect because while maintaining integrity is crucial, it doesn’t specifically address the proactive steps an intermediary should take when encountering a potentially fraudulent claim.

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, the IARB specifically addresses the conduct and registration of agents.

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) is only a remote or indirect cause of the loss, the exclusion will still apply. Therefore, a loss indirectly caused by war, even if the immediate cause was a train accident, would be excluded under such wording. The other options represent different interpretations or scenarios not covered by the ‘directly or indirectly’ wording in the context of proximate cause modification.

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 at fault bears the ultimate financial responsibility. The insurer’s right to subrogation is limited to the amount it has paid out as indemnity, meaning it cannot profit from the recovery. While subrogation can arise from various legal bases, including tort, contract, and statute, its core purpose is to transfer the insured’s recovery rights to the insurer.

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 minor ailment that, while not directly causing the claim, could be considered material to the insurer’s assessment of risk. This aligns with the definition of non-fraudulent non-disclosure, which is an innocent or negligent omission of material facts, distinct from fraudulent misrepresentation or a complete lack of disclosure.

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 aligns with the principle of providing advice only within one’s expertise or seeking support when needed to ensure accurate and appropriate recommendations.

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 key aspect relates to the educational and experiential background. Specifically, an individual must possess an acceptable insurance qualification and have at least two years of experience in a management role within the insurance industry. Alternatively, if they lack such a qualification, they need a minimum of five years of insurance industry experience, with at least two of those years in a management capacity, and must have passed relevant Insurance Intermediaries Qualifying Examination (IIQE) papers, unless exempted. The question tests the understanding of these dual pathways for meeting the experience and qualification criteria, particularly the distinction between having a recognized qualification versus relying solely on extensive industry experience.

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 meeting minimum standards.

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 a 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 automatic sprinkler system reduces the risk, 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 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 or destroyed, the insurer pays the agreed value, which might be higher than the market value at the time of the 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 at the time of the loss. If the property is underinsured, the payout will be less than the loss, enforcing indemnity rather than exceeding it. 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 tests the understanding of how salvage value impacts the indemnity provided by an insurance policy. When damaged property has a residual value after a loss, this value is factored into the calculation of the payout. The insurer can either deduct the salvage value from the claim amount, allowing the insured to retain the salvaged item, or the insurer can take possession of the salvage and pay the full claim. In this scenario, the insurer chose the latter, meaning they paid the full agreed-upon value of the vehicle and then took ownership of the damaged car to recoup some of their costs by selling it for its salvage value. Therefore, the net cost to the insurer is the indemnity paid minus the value they recovered from the salvage.

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.

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 on how to conduct customer interactions, particularly during the Customer Due Diligence (CDD) process, in a manner that avoids any suggestion of suspicion. The Guideline emphasizes that FIs need to equip their staff, including appointed insurance agents, with the knowledge to identify unusual or suspicious activities by understanding their customers’ normal behavior and transaction patterns. Therefore, the most comprehensive approach to preventing tipping off involves proactive training and the implementation of specific procedures during customer interactions.

The Personal Data (Privacy) Ordinance (PDPO) mandates that data users must take specific actions before using personal data for direct marketing. This includes informing the data subject about the intended use and providing a mechanism for them to object. While a contract is a common method for data users to impose obligations on data processors, 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, a data user can utilize these non-contractual methods to ensure a data processor adheres to data protection requirements, even if a formal contract is not in place for that specific aspect.

The Insurance Ordinance in Hong Kong strictly prohibits an individual from simultaneously holding the roles of an appointed insurance agent and an authorised insurance broker. This is to prevent conflicts of interest and ensure clear lines of responsibility within the insurance industry. The regulation aims to maintain the integrity of both agency and brokerage functions by enforcing a separation of these roles, regardless of whether the clients are the same or different. Therefore, an individual cannot act as both an appointed agent for an insurer and an authorised broker.

The ‘single article limit’ in a household contents policy is a clause designed to manage the insurer’s risk when a single, highly valuable item constitutes a disproportionately large percentage of the total sum insured for all contents. If such an item is not specifically declared and insured for its individual value, the policy will cap the payout for that item to a predetermined amount, regardless of its actual market value at the time of loss. This prevents a situation where a single item’s value could effectively exhaust the entire sum insured, leaving other contents underinsured and exposing the insurer to a concentrated risk, particularly concerning theft. The insured has the option to declare such valuable items separately to ensure they are covered up to their full declared value.

This question tests the understanding of the role of an accountant within an insurance company, specifically focusing on the importance of managing company assets. While record-keeping, collections, and payments are all crucial functions, the prompt highlights the accountant’s responsibility for the care and placement of company assets, particularly when there isn’t a dedicated investment department. This responsibility is paramount for ensuring the security of assets, achieving competitive returns, and maintaining sufficient liquidity to meet financial obligations. Therefore, the most critical aspect of the accountant’s investment-related duties, as presented in the context of asset management, is ensuring the optimal balance of security, yield, and liquidity.

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, they are specific measures within the broader framework of risk mitigation. The AMLO also outlines penalties for contraventions, but the question asks about the proactive measures required to prevent such contraventions and mitigate risks, which is directly addressed by the requirement for proper safeguards.

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 business development teams. Therefore, both determining risk insurability and arranging new product launches are outside the typical responsibilities of an Accounts department.

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.

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 itself.

This question tests the understanding of an insurance intermediary’s role in preventing corruption and fraud, specifically referencing the ICAC’s initiatives and the ‘Practical Guide on Professional Ethics for Life Insurance Intermediaries’. The ICAC provides free and confidential services, including best practice packages and advice, to help organizations prevent corruption. For the insurance industry, they offer training and have collaborated on a guide to enhance ethical conduct and reduce regulatory violations. Therefore, familiarizing oneself with these resources and the relevant Ordinance is crucial for intermediaries to prevent corrupt practices.

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.

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.

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 responsible party bears the cost. The insurer’s right to subrogation is limited to the amount it has paid out as indemnity. Therefore, if the insurer paid HK$50,000 for a loss caused by a third party, it can only recover up to HK$50,000 from that third party, even if the total loss suffered by the insured was greater.