IIQE Paper 1 Principles and Practice of Insurance Examination Quiz 37

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. Failure to provide this notification constitutes an offence. The scenario describes a data user intending to use existing customer data for a new marketing campaign without informing them of their opt-out rights, which directly contravenes this requirement.

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 such as tort, contract, or statute, its core purpose is to transfer the insured’s recovery rights to the insurer.

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, identified by letters A through I. Class F, Capital Redemption, specifically deals with contracts providing a capital sum at the end of a term to replace capital, and is explicitly stated as not being related to human life. This distinguishes it from classes like A (Life and Annuity), B (Marriage and Birth), C (Linked Long Term), and D (Permanent Health), which are directly linked to human life events or longevity. Class G, H, and I relate to retirement schemes, which also involve human life. Therefore, a contract designed solely to provide a capital sum at a future date, independent of any human life contingency, falls under the Capital Redemption 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.

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. This principle ensures that the legal system does not lend its authority to agreements that undermine societal order or statutory provisions. Therefore, an agreement to facilitate an illegal gambling operation would be void due to its contravention of the law.

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 its inception. Therefore, an insurance policy that facilitates or is based on an illegal act would be invalid.

This question tests the understanding of an insurer’s obligations regarding its members’ financial statements and auditor reports, as stipulated by relevant regulations. Specifically, it focuses on the requirement for the insurer to receive and review these documents to ensure compliance with membership rules and to identify any adverse findings in the auditors’ reports. Option (a) correctly reflects the dual obligation: receiving the financial statements and auditor’s reports, and then reviewing them for compliance and adverse statements. Option (b) is incorrect because it only mentions receiving the statements, not the review process. Option (c) is incorrect as it focuses solely on the auditor’s review of minimum requirements and omits the financial statements. Option (d) is incorrect because it only addresses the receipt of financial statements and not the crucial review of auditor’s reports for adverse statements or qualifications.

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 may be fraudulent. The key is to assist the insurer and the law in combating fraud, but with sensitivity, as alleging fraud is a serious matter for the insurer to handle. Therefore, maintaining close communication with the insurer about suspicious claims is a crucial practical step.

The Personal Data (Privacy) Ordinance (PDPO) in Hong Kong mandates that when a data user intends to use personal data for direct marketing, they must provide specific prescribed information to the data subject. This information includes the types of personal data to be used, the categories of marketing subjects, and, if applicable, the classes of persons to whom the data will be provided for direct marketing. Crucially, if the data is provided to others for gain, the data user must also inform the data subject of this fact. The information must be presented in an easily readable and understandable format. The question tests the understanding of these disclosure requirements under the PDPO for direct marketing purposes.

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. The question tests the understanding of the scope of application of the PDPO, which is a fundamental aspect of data privacy regulations in Hong Kong.

An insurance broker has a fundamental duty to prioritize their client’s interests above all other considerations. This principle is paramount when providing advice or arranging insurance. Limiting a client’s choices of insurers without a valid reason would be contrary to this duty, as it restricts the client’s ability to secure the most suitable coverage. Similarly, being overly reliant on a single insurer could compromise the broker’s ability to offer the best options, potentially disadvantaging the client. Therefore, maintaining independence and offering a broad range of suitable choices are essential components of acting in the client’s best interest.

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.

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 insured has a claim against a third party for HK$10,000 and the insurer has paid HK$8,000 for the loss, the insurer can only recover a maximum of HK$8,000 from the third party through subrogation. The remaining HK$2,000 would still be recoverable by the insured directly from the third party.

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 payout) 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.

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 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 during 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.

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 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, both determining risk insurability and launching new products are outside the typical responsibilities of the Accounts department.

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 registered person has sufficient time to complete any required Continuing Professional Development (CPD) and to meet the ‘fit and proper’ criteria before the existing registration lapses, maintaining compliance with regulatory requirements.

Insurable interest is a fundamental principle in insurance, requiring the policyholder to have a legitimate financial stake in the subject matter of the insurance. This interest must exist at the time of the loss for indemnity insurance, but for life insurance, it is only required at the policy’s inception. A property management company, acting as an agent for building owners, can secure insurance for the building. While the property management company might be named as the insured in the policy, their insurable interest is derived from the principal (the building owners) they represent. Therefore, if the property management company procures insurance on behalf of the owners, and the owners have an insurable interest, the policy is valid even if the property management company itself doesn’t have direct ownership. The question tests the understanding of how insurable interest can be derived through agency relationships in property insurance.

The question tests the understanding of how insurers might internally classify their business operations for management and control. While the statutory classification (Classes 8-17) dictates licensing, insurers have flexibility in their internal structure. Classifying by the source of business (agents, brokers, direct) is a common and practical approach for managing sales channels and intermediary relationships, which is crucial for operational efficiency and performance tracking. The other options represent different, less common or less comprehensive internal classification methods.

Contribution between insurers applies when multiple policies cover the same loss. For contribution to be applicable, several conditions must be met. These include that each policy must provide indemnity, cover the same interest affected, cover the peril causing the loss, cover the subject matter affected, and each policy must be liable for the loss (i.e., not subject to an exclusion that prevents contribution). In this scenario, while both policies cover the same property and the same peril (fire), they are insuring different interests: the merchant’s interest as owner and the warehouse operator’s interest as a bailee. Since the policies do not cover the same interest, the condition for contribution is not met, and therefore, contribution between the insurers will not apply.

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 for the distribution of profits to policyholders. These bonuses can be paid in various ways, such as reversionary bonuses (added to the sum assured), cash bonuses, or options to reduce premiums. Therefore, bonuses are the direct manifestation of profit sharing in participating policies.

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.

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 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 loss. If the sum insured is less than the value of the property, the insured bears a portion of the loss, and this condition prevents a payout exceeding indemnity; in fact, it often reduces it.

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. Conversely, a ‘speculative risk’ involves the possibility of gain as well as loss. ‘Particular risk’ refers to a risk that affects only an individual or a small group, while ‘fundamental risk’ affects a large segment of society or the economy. Therefore, a risk that presents only the potential for loss, without any possibility of a positive financial outcome, is classified as a pure risk.

This question tests the understanding of product development in the context of insurance, specifically 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 portfolio remains competitive and relevant. 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 competition and evolving customer demands as outlined in the syllabus.

Guidance Note 6 (GN6) clarifies that an insurance agent, Responsible Officer, or Technical Representative cannot solicit or conduct insurance business for a principal before receiving written confirmation of their registration from the Insurance Authority Registration Board (IARB). Acting as an unregistered agent is an offense under Section 77 of the Insurance Ordinance, potentially leading to prosecution. Therefore, the effective date of registration, as indicated in the Notice of Confirmation of Registration, is the earliest point at which an individual can legally represent an appointing principal.

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.

Guidance Note 6 (GN6) clarifies that an insurance agent, Responsible Officer, or Technical Representative cannot legally conduct insurance business or represent themselves as such before receiving written confirmation of their registration from the IARB. Section 77 of the Insurance Ordinance makes it an offense to act as an insurance agent without proper registration. Therefore, any activity before the specified effective date on the Notice of Confirmation of Registration is a violation, potentially leading to prosecution or impacting fitness and properness.

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.