IIQE Paper 1 Principles and Practice of Insurance Examination Quiz 35

The Insurance Authority (IA) mandates that travel insurance agents, their responsible officers (ROs), and technical representatives (TRs) must complete 3 Continuing Professional Development (CPD) hours annually, starting from August 1, 2008. This requirement is crucial for maintaining their registration status. Failure to meet this requirement can lead to revocation of registration. For instance, a first-time failure to meet CPD hours typically results in a 3-month revocation, with a requirement to complete the outstanding hours upon re-registration. More severe breaches, such as false declarations of CPD compliance, carry a more significant penalty of a 12-month revocation. The IA also has the authority to revoke registration for a specified period if an individual fails to provide proof of CPD compliance when requested, and future registration will be contingent on providing such proof.

This question tests the understanding of how proximate cause applies when multiple perils are involved in a loss, specifically focusing on the relationship between insured and uninsured perils. The scenario describes a chain of events starting with an uninsured peril (master’s negligence) leading to a series of other perils, ultimately causing damage by seawater (an uninsured peril in many cargo policies). According to the principles of proximate cause as outlined in the syllabus, if an uninsured peril directly leads to an insured peril, and that insured peril then leads to the loss, the loss is generally covered. In this case, the negligence (uninsured) leads to collision (potentially insured or uninsured depending on policy), which leads to fire (insured), which leads to explosion (insured), which leads to leaks and seawater damage (uninsured). The key is that the chain of events, tracing back from the final loss, involves insured perils. The illustration provided in the syllabus material explicitly states that if an uninsured peril causes a chain of events that includes insured perils, and the final loss is a consequence of that chain, the loss can be recoverable under the policies covering the insured perils within that chain, even if the ultimate cause or the immediate cause of the damage is an uninsured peril. Therefore, the cargo damage is recoverable under each policy as the chain of events includes insured perils like fire and explosion.

The Insurance Authority (IA) mandates that insurers conducting employees’ compensation and motor insurance business must undergo an annual actuarial review of their reserves. This review is to be conducted according to specific criteria, and the resulting actuarial report, certified by an appointed actuary, must be submitted to the IA within a stipulated timeframe. This requirement extends to both direct insurers and professional reinsurers. Long-term insurers have a similar, though distinct, obligation to commission a periodic actuarial investigation into their financial condition, typically every 12 months, and submit an abstract of the report along with a certificate from the appointed actuary to the IA.

The question tests the understanding of how insurers internally classify their business operations. While regulatory classifications exist (like those in the Insurance Ordinance), insurers often adopt practical classifications for management. The U.S. style classification clearly separates Life and Non-Life business, with Non-Life further broken down into categories like Fire, Marine, Bonding, and Casualty. This aligns with the provided text which describes the U.S. style as having a clear distinction between Life and Non-Life, with the latter subdivided. Option B describes a UK/European style, Option C describes a classification by source of business, and Option D describes a classification by type of client, none of which are the U.S. style classification.

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. The Personal Data (Privacy) Ordinance, particularly Data Protection Principle 1, mandates that personal data should only be collected by lawful and fair means and for specified purposes. Using data collected for one company’s marketing for another company’s marketing constitutes a change in purpose and is not a fair means of collection, as it involves unauthorized copying and use of proprietary customer information. The guidance note specifically advises against copying customer information when changing employment to prevent such misuse.

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 definition encompasses both the direct provision of funds and the collection of funds for such purposes, regardless of whether the property is ultimately used for a terrorist act. Option (b) describes making property or services available to a known or suspected terrorist or associate, which is a component of terrorist financing but not the overarching definition. Option (c) focuses solely on the collection or solicitation of funds for a terrorist or associate, which is a part of the broader definition but doesn’t cover the provision of property. Option (d) is incorrect as it misrepresents the core definition by focusing on the source of funds rather than the intent or knowledge of their use for terrorist acts.

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 exclusively deals with reinsurance, which is a different category.

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. 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. If the property is underinsured, the payout will be less than the loss, enforcing indemnity rather than exceeding it.

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 to conduct customer inquiries in a manner that avoids any suggestion of tipping off. The Guideline emphasizes proactive measures, such as understanding customer behavior and transaction patterns, to identify unusual activities. Therefore, the most comprehensive approach to preventing tipping off involves a combination of internal controls, staff training, and careful customer interaction protocols.

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 compliance and maintain professional standards, and this provision allows them to address non-compliance by intermediaries or their principals.

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 adjusted the premium or terms had they known. Option B describes fraud, which involves intentional deception. Option C describes a breach of policy conditions, which relates to specific terms within the policy. Option D describes a situation where the insurer is at fault, which is not the case here.

A registered person selling long-term insurance must make reasonable efforts to ensure the policy aligns with the client’s disclosed needs and financial capacity. This includes understanding the client’s situation and recommending a suitable product, rather than pushing any available policy. The other options describe actions that are either not explicitly required or are potentially misleading. Offering a rebate not specified in the policy is prohibited, and while explaining differences is important, it’s secondary to suitability. Focusing solely on favorable aspects of an illustration is also a prohibited practice.

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 personal data. Its scope is broad and encompasses both the public sector and the private sector. This means that government departments, statutory bodies, as well as companies and organizations operating in the private sphere, are all subject to the provisions of the PDPO when they handle personal data. Therefore, the Ordinance applies to both sectors.

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 scenario describes a situation where a company is sharing customer data with a third-party marketing firm for promotional purposes. According to the PDPO, the original data user must inform the data subject about the types of data being shared, the marketing categories, and importantly, that the data is being provided to another entity for direct marketing, especially if there is a financial gain involved. The question tests the understanding of these disclosure requirements under the PDPO.

The question tests the understanding of the minimum paid-up capital requirements for authorized insurers in Hong Kong, specifically for a captive insurer. According to the provided syllabus information, a captive insurer has a minimum paid-up capital requirement of HK$2 million. The other options represent different capital requirements for other types of insurers or business lines, or are simply incorrect figures.

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 by principals or registered persons, receive investigation reports, and require disciplinary action. Furthermore, the IARB is responsible for registering and revoking the registration of Insurance Agents, Responsible Officers, and Technical Representatives. Finally, it is mandated to report breaches of the Insurance Ordinance or the Code, or instances where a registered person is no longer deemed fit and proper, to the Insurance Authority (IA). Therefore, all these functions fall within the purview of the IARB’s responsibilities.

The scenario describes an insurance agent who, as an appointed agent, typically provides customer and transaction documentation directly to the insurer and does not maintain these records themselves. According to the Guideline, in such an arrangement, these individual agents are considered to have deposited the required records with the insurer. However, the agents remain responsible for ensuring compliance. This responsibility entails verifying that the insurer has robust systems in place to meet all record-keeping obligations under the Anti-Money Laundering Ordinance (AMLO) and that these records are readily accessible to a relevant authority (RA) upon request. Therefore, the agent must confirm the insurer’s compliance and accessibility of records.

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 inception of the policy. A property management company, acting as an agent for building owners, can secure insurance for the building. While the property management company itself might not have absolute ownership, its authority to manage and insure the property on behalf of the owners grants it a form of insurable interest derived from the principal’s interest. This interest is sufficient to validate the insurance policy, even if the property management company is named as the insured, as it acts in a representative capacity. Therefore, the property management company has an insurable interest in the building due to its agency relationship and the potential financial repercussions if the building were damaged, impacting its management fees or reputation.

This question tests the understanding of when insurable interest is required for different types of insurance contracts, specifically contrasting life insurance with other indemnity contracts. The provided text states that for life insurance, insurable interest is only needed at policy inception. For marine insurance, it’s needed at the time of loss, and this rule is likely applicable to other indemnity contracts. Therefore, a policy on a life where the insurable interest existed at the start but has since lapsed would still be valid if the insured event (death) occurred while the interest was present.

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. 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 result in a payout exceeding the depreciated value. The condition of average, conversely, is a clause designed to prevent underinsurance by ensuring that the payout is proportionate to the value insured. If the sum insured is less than the value of the property, the claim payout is reduced proportionally, thus enforcing indemnity rather than exceeding it.

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 expiry. This ensures that the renewal process can be completed well in advance, maintaining compliance and continuity of service. Options B, C, and D represent periods that are either too early or too late, potentially leading to lapses in registration or unnecessary administrative burdens.

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 maintain clear lines of responsibility within the insurance industry. The ordinance aims to ensure that intermediaries clearly represent either the insurer (as an agent) or the policyholder (as a broker), but not both concurrently, regardless of whether the clients or the insurance products are the same or different.

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.

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, if an RP fails to respond to a request from the IA to produce proof of compliance with CPD requirements, their registration should be revoked for a period determined by the IA. Furthermore, their future applications for registration will not be processed unless they can provide the required proof of compliance. This directly aligns with the consequence of non-compliance for failing to provide requested documentation.

The Personal Data (Privacy) Ordinance (PDPO) in Hong Kong is a comprehensive piece of legislation designed to protect the privacy of individuals concerning their personal data. It applies broadly to the collection, holding, processing, and use of personal data by both public and private sector organizations. The Ordinance establishes data protection principles that all data users must adhere to, regardless of whether they are government bodies or commercial enterprises. Therefore, it encompasses both sectors.

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, 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 relevant ordinance because local laws prevent it, the FI has two primary obligations. First, it must inform its relevant authority (RA) about this non-compliance. Second, and crucially, it must implement additional measures to effectively mitigate the Anti-Money Laundering and Counter-Terrorist Financing (AML/CFT) risks that arise from this inability to adhere to the stipulated Hong Kong standards. This ensures that even with local legal constraints, the FI maintains a robust defense against financial crime.

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 key compliance obligation under the Ordinance.

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. Therefore, if the insured has a claim against a third party for HK$100,000 and the insurer has paid HK$80,000 in indemnity, the insurer can only recover up to HK$80,000 from the third party. The remaining HK$20,000 would be the insured’s to claim directly from the third party, or if the third party pays the full HK$100,000 to the insurer, the insurer must return the excess HK$20,000 to the insured.

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 disputes, and the Insurance Ordinance provides the overarching regulatory framework, the IARB specifically addresses the conduct and registration of agents.

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 to conduct customer inquiries in a manner that does not suggest suspicion. The Guideline emphasizes that knowing a customer’s normal activities is key to identifying unusual transactions. Therefore, an FI’s internal systems and staff training must be geared towards recognizing suspicious behavior without tipping off the customer. Option (a) directly addresses the FI’s responsibility to implement controls and train staff to avoid tipping off, which is the primary focus of the provided text regarding preventing ML/TF offenses.