IIQE Paper 1 Principles and Practice of Insurance Examination Quiz 36

The Insurance Authority (IA) mandates specific minimum requirements for individuals seeking to operate as insurance brokers or for bodies of insurance brokers seeking approval. These requirements are designed to ensure competence, financial stability, and ethical conduct within the industry. Specifically, Section 6.2.3a of the provided text outlines these minimum requirements, which encompass qualifications and experience, capital and net assets, professional indemnity insurance, client account management, and proper bookkeeping. The IA’s approval process for a body of insurance brokers also hinges on the adequacy of its internal rules and regulations to ensure its members meet these standards and are considered ‘fit and proper’. Therefore, a broker must either be authorized directly by the IA or be a member of an IA-approved body, both of which necessitate adherence to these stipulated minimums.

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. ‘Specific Business’ is not a recognized broad category under the Ordinance. ‘Accident Insurance’ falls under General Business, and ‘Long Tail Business’ is a descriptive term for certain types of claims that may take a long time to settle, but it is not a formal classification of insurance business under the Ordinance.

The question tests the understanding of the concept of ‘Agency by Estoppel’ within contract law as it applies to insurance. Agency by Estoppel arises when a principal, through their words or actions, leads a third party to believe that another person is their agent. If the third party acts on this representation, the principal is then prevented (estopped) from denying the existence of the agency relationship. This is distinct from apparent authority, where the agent is genuinely appointed but appears to have broader powers than actually granted. In the scenario, Mr. Chan’s consistent behaviour of allowing Ms. Lee to present herself as his representative, coupled with his failure to correct this misrepresentation, creates the conditions for agency by estoppel. Therefore, he would be bound by her actions towards a third party who reasonably relied on this appearance of authority.

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. Crucially, this definition explicitly includes both individual natural persons acting as agents and entities operating as insurance agencies (sole proprietorships, partnerships, or corporations). It also clarifies that the term ‘Insurance Agent’ for the purposes of the Code does not encompass Responsible Officers or Technical Representatives, who are defined separately as roles associated with an Insurance Agency or Individual Agent.

The Code of Practice for the Administration of Insurance Agents defines an ‘Insurance Agent’ broadly to encompass individuals and agencies acting on behalf of insurers. Crucially, it explicitly excludes ‘Responsible Officers’ and ‘Technical Representatives’ from this definition, as these roles are defined separately within the Code and have distinct responsibilities and registration requirements. Therefore, a person acting as a Responsible Officer for an insurance agency is not, by definition within the Code, considered an ‘Insurance Agent’ in their capacity as a Responsible Officer.

The question tests the understanding of how salvage value impacts the indemnity provided by an insurer. When damaged property has residual value (salvage), this value is factored into the calculation of the loss. The insurer can either deduct the salvage value from the payout, allowing the insured to retain the salvaged item, or the insurer can take possession of the salvage and dispose of it, effectively covering the full loss. Option A correctly reflects the principle that the insurer’s liability is reduced by the value of the salvage if the insured keeps it. Option B is incorrect because the insurer’s liability is not increased by the salvage value; rather, it’s the insured’s recovery that is affected. Option C is incorrect as the insurer typically does not pay the full loss *and* retain the salvage without accounting for its value in the indemnity calculation. Option D is incorrect because salvage value is a deduction from the loss, not an addition to the sum insured.

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 for use at a new institution is an example of improper data handling and collection.

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.

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 (e.g., due to a deductible or a policy limit), and the insured recovers an amount from a third party that covers the entire loss, the insurer is entitled to a proportionate share of that recovery. The insured retains any amount recovered that exceeds the total loss, and if the recovery is insufficient to cover the entire loss, the insurer and insured would share the recovery proportionally to their respective shares of the loss. In this scenario, the insurer paid HK$50,000 of a HK$80,000 loss, meaning the insured bore HK$30,000. If the third party pays HK$60,000, the insurer is entitled to recover its payment of HK$50,000. The remaining HK$10,000 of the recovery would go to the insured, as it partially covers their uninsured portion of the loss. Therefore, the insurer’s claim is limited to the amount it paid.

The Insurance Ordinance mandates that authorized insurers maintain adequate reinsurance arrangements. This is a critical aspect of financial supervision, focusing on both the quantity and the collectability of reinsurance. The IA has specific guidelines, particularly for reinsurance with related companies, to mitigate potential conflicts of interest and protect policyholders. While reinsurance is crucial for financial security, the primary regulatory concern is ensuring the insurer’s overall solvency and the protection of the insuring public, which is directly addressed by requiring adequate reinsurance.

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 insurer would have likely assessed the risk differently had they known. Option B describes a breach of ordinary good faith, which requires active misrepresentation or lying. Option C describes fraud, which involves intentional deception. Option D describes a situation where the fact is not material, which would not constitute a breach of good faith.

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 an indemnity, cover the same interest affected, cover the same peril causing the loss, cover the same subject matter, 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 owner’s interest in the building and the tenant’s interest in the improvements. Since the interests covered are different, contribution between the insurers will not apply.

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. Options B, C, and D describe different policy features or concepts: ‘reinstatement insurance’ and ‘new for old’ cover relate to how claims are settled without deductions for depreciation, while ‘section limit’ refers to a sub-limit within a policy covering different types of risks or subject matter.

The question tests the understanding of the minimum net asset requirements for different types of insurance brokers. 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. Therefore, the incorporated broker has a higher overall financial requirement.

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.

Terrorist financing, as defined by relevant legislation, involves the provision or collection of property with the intention or knowledge that it will be used, in whole or in part, to commit terrorist acts. This can occur even if the property is not ultimately used for such purposes. Option (b) describes making property or services available to a known or suspected terrorist or associate, which is also a form of terrorist financing. Option (c) focuses on the collection or solicitation of funds for such individuals. However, the core definition of terrorist financing encompasses the intent and use of property for terrorist acts, making option (a) the most comprehensive and direct definition.

The scenario describes a Registered Person (RP) who has failed to submit proof of their Continuing Professional Development (CPD) hours when requested by the Insurance Authority (IA). According to the provided information, failure to respond to a request for proof of CPD compliance can lead to the revocation of the RP’s registration for a period determined by the IA. Furthermore, any future application for registration will not be processed until proof of compliance is provided. This directly addresses the consequence of non-compliance with CPD requirements when a request for verification is made.

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.

Contribution between insurers applies when multiple policies cover the same loss. For contribution to apply, several conditions must be met. These include that each policy must provide indemnity, cover the same interest affected, cover the same peril causing the loss, cover the same subject matter, and each policy must be liable for the loss (i.e., not subject to an exclusion that prevents contribution). In this scenario, the fire policy taken by the merchant covers their interest as the owner of the stock. The warehouse operator’s policy, while covering the same physical stock, is for their interest as a bailee. Since the policies cover different interests, contribution between the insurers will not apply, even though the same physical property was affected by the same peril. Therefore, the insurer of the merchant would be liable for the full amount of the merchant’s loss, up to the policy limit, and the warehouse operator’s insurer would be liable for the warehouse operator’s loss, up to their policy limit.

The United Nations (Anti-Terrorism Measures) Ordinance (UNATMO) empowers the Secretary for Security to freeze assets suspected of being linked to terrorism. It is an offense to deal with such frozen property without a license. The ordinance also prohibits making property or financial services available to terrorists or their associates, or collecting property for them, except under a license. Contravention of these provisions can lead to severe penalties, including imprisonment and fines. The scenario describes a financial institution (FI) receiving a directive to freeze assets based on a UNATMO notice. The FI’s obligation is to comply with this directive by ceasing all dealings with the specified property, unless a specific license is granted by the Secretary for Security to permit certain transactions. Therefore, the most appropriate action is to immediately cease all transactions involving the designated property.

The Insurance Authority (IA) and the Insurance Agents Registration Board (IARB) assess whether an individual is ‘fit and proper’ to be registered as an insurance intermediary. A key aspect of this assessment involves reviewing past conduct. Specifically, the Code of Conduct for Persons Licensed by the IA (the Code) outlines criteria for determining fitness and propriety. Clause 6/31 (viii) explicitly states that a person may be considered not fit and proper if they have been found not to have complied with or to be in breach of the Code or the rules of the Hong Kong Federation of Insurers (HKFI). This includes any past disciplinary actions or findings of non-compliance. Therefore, a history of non-compliance with regulatory codes is a direct indicator of potential unsuitability for registration.

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 share of profits allocated to policyholders. These bonuses can be paid in various forms, such as cash, reversionary additions to the sum assured, or used to reduce premiums. Therefore, bonuses are the direct manifestation of profit sharing in participating policies.

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 assets and liabilities. Determining the insurability of a risk falls under the purview of the Underwriting department, which assesses the likelihood and severity of potential losses. Similarly, the development and launch of new policy products is a strategic function involving product development, marketing, and actuarial teams, not typically the Accounts department. While the Accounts department might be involved in the financial aspects of a product launch (e.g., budgeting), the primary responsibility for the decision and execution lies elsewhere. Therefore, determining risk insurability and arranging new policy launches are not core responsibilities of the Accounts department.

The Insurance Complaints Committee (ICCB) Panel has the authority to review complaints against insurers. While the policy terms generally prevail, the Panel can deviate from a strict interpretation if it deems the outcome unfair or unreasonable to the complainant. This power is guided by the Articles of Association of the ICCB, which mandates consideration of the relevant policy, general principles of good insurance practice, applicable law, and guidelines from bodies like the Hong Kong Federation of Insurers (HKFI) or the Bureau. Specifically, the Code of Conduct for Insurers, particularly Part III concerning claims, emphasizes efficient, speedy, and fair handling of claims. Therefore, the Panel’s assessment of fairness in claim settlement is a key aspect of its review, allowing it to look beyond the literal wording of the policy if necessary to ensure a just outcome for the policyholder.

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

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.

The principle of insurable interest is fundamental to the validity of an insurance contract. It requires the policyholder to have a legally recognized relationship with the subject matter of the insurance, such that they would suffer a financial loss if the insured event occurs. Without this interest, the contract is void. While a financial relationship is often the basis, it must be legally recognized. For instance, a creditor has an insurable interest in the life of their debtor, but not necessarily in the debtor’s property unless it’s collateral. The question tests the understanding that a legally recognized relationship, leading to potential financial loss, is the core requirement, not just any financial connection.

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 can result in a payout greater than the indemnity value of the old item. Agreed value policies fix the value of the insured item at the outset of the policy. If the item is a total loss, the insurer pays the agreed value, which might be higher than the market value at the time of the loss. Reinstatement insurance allows the insured to replace the lost or damaged property with new property of a similar kind and quality, which can also lead to a payout exceeding the indemnity value of the original item. The condition of average, however, is a condition that applies when the sum insured is less than the value of the property, and it reduces the payout proportionally to the underinsurance, thus preventing a payout greater than the indemnity.

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 detailing the relevant acts. This defence is specifically linked to the act of reporting suspicious property or financial activities, not to general compliance with anti-money laundering guidelines. Therefore, while adhering to the IA’s Guideline on AML/CFT is crucial for overall compliance and risk mitigation, it does not directly confer a statutory defence against the specific offences outlined in UNATMO concerning the provision or collection of property for terrorist purposes.

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 oversight by the Insurance Authority (IA). The IA’s concern extends to both the quantity and the collectability of reinsurance. When an insurer reinsures with a related company, the IA’s Guideline on Reinsurance with Related Companies is particularly relevant. This guideline aims to ensure that the insurer’s prudent control over its reinsurance is not compromised, thereby protecting the interests of policyholders. Therefore, the IA’s assessment of reinsurance adequacy, especially with related parties, is a key supervisory focus.