IIQE Paper 1 Principles and Practice of Insurance Examination Quiz 38

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 represent different concepts: ‘Product Development’ is broader, ‘Professional Indemnity Insurance’ is a specific type of cover, and ‘Reinsurance’ is about transferring risk between insurers.

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 question tests the understanding of the insurer’s responsibility in managing their appointed agents, specifically concerning compliance with regulatory codes. According to the provided syllabus (Section 6.1.2d), insurers are generally responsible for ensuring that their insurance agents adhere to the law and relevant industry codes. This includes ensuring agents are properly registered. Therefore, an insurer failing to ensure an agent’s registration is a direct contravention of this oversight responsibility.

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 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 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 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 linked to terrorism financing. By reporting this suspicion to the JFIU, the intermediary is taking a proactive step to comply with the UNATMO and potentially avail themselves of the statutory defence against prosecution for the underlying offence of providing or collecting property for terrorist purposes.

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 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.

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, doubtful documentation, or verbal cues that suggest a claim is not legitimate. 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. Therefore, the intermediary’s proactive approach to identifying and reporting suspicious claims aligns with their ethical and legal 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, brokers must keep detailed records of all transactions involving insurers, clients, and themselves, as well as all income and expenses, and their assets and liabilities. These records are required to be retained for a minimum of seven years. Therefore, the primary purpose of these record-keeping requirements is to ensure transparency, accountability, and the ability to verify the broker’s financial health and operational integrity.

This question tests the understanding of how subrogation proceeds are shared when the recovery from a negligent third party exceeds the total loss suffered by the insured. In the ‘Excess’ method of subrogation sharing, the insurer is typically reimbursed first for the amount they paid out. If the recovery is more than what the insurer paid, the excess amount goes to the insured until they are made whole for their uninsured portion of the loss. In this scenario, the insured’s loss was $10,000, and the insurer paid $40,000. The total loss is $50,000. The recovery is $45,000. The insurer is entitled to be repaid the $40,000 they paid. The remaining $5,000 ($45,000 – $40,000) then goes to the insured to cover their $10,000 uninsured portion of the loss. Therefore, the insured receives $5,000 and the insurer receives $40,000.

The Insurance Claims Complaints Bureau (ICCB) is designed to handle complaints from individual policyholders concerning personal insurance claims. The Panel, appointed by the ICCB, has the authority to make awards against insurers. A key aspect of the Panel’s power is that an insurer cannot appeal an award made against them. However, if a complainant is dissatisfied with the award, they retain the right to pursue legal avenues for redress. This structure ensures a finality for the insurer regarding the Panel’s decision while preserving the complainant’s options if they deem the award insufficient.

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 (specifically section 7.4.6c), 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 AMLO due to local laws, the FI has two primary obligations. First, it must inform its relevant authority (RA) of this non-compliance. Second, it must implement additional measures to effectively mitigate the Anti-Money Laundering/Counter-Terrorist Financing (AML/CFT) risks arising from this inability to comply. The options provided test the understanding of these specific obligations. Option A correctly identifies both informing the RA and taking additional mitigation measures. Option B is incorrect because while informing the RA is necessary, simply ceasing operations in that jurisdiction is not the mandated action; mitigation is required. Option C is incorrect as it suggests reporting to the Joint Financial Intelligence Unit (JFIU) without the specific condition of Section 25A of OSCO/DTROP applying, and it omits the crucial step of informing the RA. Option D is incorrect because while seeking legal advice is prudent, it is not the primary regulatory requirement outlined for this specific situation; the core requirements are informing the RA and implementing mitigation.

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. The other options describe different insurance concepts: ‘reinstatement insurance’ and ‘new for old’ cover relate to how claims are settled without deductions for wear and tear, while ‘section limit’ applies to distinct parts of a policy covering different subject matters or perils.

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.

The Insurance Authority (IA) mandates that insurance brokers must submit annual audited financial statements and an auditor’s report confirming compliance with minimum requirements. This report, along with the financial statements, must be submitted within six months after the close of the financial year. This requirement ensures the financial health and operational integrity of the brokerage, safeguarding client interests and maintaining market stability. Failure to comply can lead to regulatory action.

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 as a limitation on premium income. 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.

This question tests the understanding of an authorized insurer’s obligations regarding its members’ financial statements and auditor reports, as stipulated by relevant Hong Kong insurance regulations. Specifically, it focuses on the insurer’s responsibility to ensure it has received these documents and that the auditor’s reports are free from adverse statements or qualifications, unless explicitly noted. The correct answer reflects the dual requirement of receiving the financial statements and auditor’s reports, and verifying the absence of adverse findings in those reports, aligning with the oversight responsibilities of an authorized insurer.

This question tests the understanding of how proximate cause operates when multiple perils are involved, specifically focusing on the relationship between insured and uninsured perils in a chain of events. The scenario describes a sequence starting with an uninsured peril (master’s negligence) leading to a series of events, including an insured peril (fire) and ultimately damage from another peril (seawater entry). According to the principles of proximate cause, if an uninsured peril directly leads to an insured peril, and that insured peril then causes the loss, the loss is generally recoverable under the policy covering the insured peril. In this case, the negligence (uninsured) caused the collision, which caused the fire (insured), which caused the leaks and seawater damage. The illustration provided in the syllabus explicitly states that if an uninsured peril leads to an insured peril, and the insured peril causes the loss, the loss is recoverable under the policy for the insured peril, even if the initial cause was uninsured. Therefore, the damage by seawater, which occurred as a consequence of the fire (an insured peril in the second policy), is recoverable under the policy covering fire, despite the initial cause being negligence.

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 (specifically section 7.4.6c), 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 AMLO due to local laws, the FI has two primary obligations. Firstly, it must inform its relevant authority (RA) of this non-compliance. Secondly, it must implement additional measures to effectively mitigate the Anti-Money Laundering/Counter-Terrorist Financing (AML/CFT) risks arising from this inability to comply. The question tests the understanding of these specific obligations in such a cross-border compliance scenario.

This question tests the understanding of how an agency relationship can be established, specifically focusing on the concept of implied actual authority. Implied actual authority arises from the conduct of the principal, the course of dealing between the principal and the agent, or the circumstances surrounding their relationship, rather than an express instruction. In the scenario, the principal’s consistent acceptance of similar, albeit uninstructed, transactions by the agent creates an expectation and a pattern of behaviour that implies the agent has the authority to continue such actions. This is distinct from apparent authority, which focuses on the principal’s representations to third parties. Ratification involves subsequent approval of an act done without prior authority. Express actual authority would involve clear, direct instructions.

The Insurance Agents Code of Conduct, as outlined in the IIQE syllabus, emphasizes the importance of clear and accurate sales materials. This includes ensuring that all promotional content is up-to-date, factually correct, and presented in a manner that the public can easily understand, thereby preventing any misleading impressions. Option (a) directly reflects this requirement by stating that sales materials must be current, precise, and comprehensible. Option (b) is incorrect because while accuracy is crucial, the primary focus of the code regarding sales materials is their clarity and truthfulness to avoid misleading the public, not necessarily their brevity. Option (c) is incorrect as the code does not mandate that sales materials must be approved by the Insurance Authority before distribution; rather, it focuses on the content’s quality. Option (d) is incorrect because while customer testimonials can be persuasive, the code’s emphasis is on the factual accuracy and clarity of the materials themselves, not on the inclusion of specific types of endorsements.

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 how subrogation proceeds are shared when the recovery from a negligent third party exceeds the total loss suffered by the insured. In the ‘Excess’ method of subrogation sharing, the insurer is typically reimbursed first for the amount they paid out. If the recovery is more than what the insurer paid, the excess amount goes to the insured until they are made whole for their uninsured portion of the loss. In this scenario, the insured’s loss was $10,000, and the insurer paid $40,000. The total loss is $50,000. The recovery is $45,000. The insurer is entitled to be repaid the $40,000 they paid. The remaining $5,000 ($45,000 recovery – $40,000 insurer payment) then goes to the insured to cover their $10,000 uninsured portion of the loss. Since the insured only receives $5,000, they are still $5,000 short of being fully compensated for their loss. Therefore, the insurer receives $40,000 and the insured receives $5,000.

This question tests the understanding of product development in the context of insurance, specifically how insurers adapt to market trends and competition. Product research is the systematic process of identifying and evaluating new insurance products or modifications to existing ones. This involves analyzing market needs, competitor offerings, and emerging risks to ensure the insurer’s portfolio remains relevant and competitive. Developing new forms of cover, whether as standalone products or as a package, is a direct outcome of effective product research and development, aligning with the goal of keeping pace with market dynamics and customer demands.

The scenario describes a situation where a customer is seeking clarification on their existing policy, specifically requesting a duplicate policy document and an amendment to their coverage details. According to the syllabus, the Customer Servicing department is responsible for handling such requests, which fall under the ‘Documentation’ function. This includes providing duplicate policies and processing amendments to existing policies. While public relations and marketing are also mentioned in the broader context of customer interaction, the specific actions described are directly related to administrative and documentation tasks handled by customer service.

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 monetary aspects of the business. Determining the insurability of a risk falls under the purview of underwriting, which involves assessing the likelihood and potential cost of a loss. 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, both determining risk insurability and arranging new product launches are outside the typical responsibilities of an accounts department.

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. Option B is incorrect because while brokers must be licensed, the question specifically asks about approved *bodies* that represent brokers, not individual licensing requirements. Option C is incorrect as the Code of Conduct for Insurers applies to insurers, not broker associations. Option D is incorrect because while client accounts are a requirement for brokers, it’s a procedural requirement, not the definition of an approved body.

The Insurance Authority (IA) has the power to impose further disciplinary or other actions on a Principal or Registered Person, including the respondent’s appointing insurance agent, if they fail to comply with a requirement to take disciplinary or other action. This is a direct consequence outlined in the regulatory framework for insurance intermediaries, emphasizing accountability within the industry. The IA’s role is to ensure adherence to standards and can escalate actions when compliance is not met.