IIQE Paper 1 Principles and Practice of Insurance Examination Quiz 33

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 performed according to specific criteria and documented in a report certified by an appointed actuary, which is then submitted to the IA within a set timeframe. This requirement extends to both direct insurers and professional reinsurers. Long-term insurers have a similar, though distinct, obligation to conduct 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 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 obligation can lead to severe consequences, including revocation of registration. Specifically, a first-time failure to meet CPD requirements typically results in a 3-month revocation, with the individual needing to complete outstanding hours upon re-registration. A false declaration regarding CPD hours carries a more severe penalty of a 12-month revocation, also requiring completion of outstanding hours for re-registration. Non-response to requests for proof of compliance can lead to a period of revocation determined by the Insurance Authority (IA), and future registration applications will not be processed without proof of compliance.

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.

The scenario describes an individual acting as an insurance agent who also sells MPF schemes. According to the provided text, an insurance agent engaging in selling or advising on MPF schemes must also be registered as an MPF intermediary with the MPFA. This requirement is distinct from their insurance agent registration and ensures compliance with regulations governing both insurance and mandatory provident fund products. Therefore, the agent must hold both registrations to operate legally in both capacities.

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.

The core of underwriting in general insurance involves a continuous assessment of risks. Unlike life insurance, where underwriting is largely a one-time event at policy inception, general insurance policies are subject to renewal. This renewal process provides insurers with the opportunity to re-evaluate the risk profile of the insured and adjust terms, premiums, or even decline renewal if the risk has become unacceptable. Therefore, the ability to review and modify terms at renewal is a fundamental aspect of managing risk in general insurance underwriting.

The principle of insurable interest is fundamental to the validity of an insurance contract. It requires that the policyholder must 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 connection, the contract is void. In this scenario, while the business owner has a financial interest in the success of their supplier, this is an indirect relationship. The direct financial loss would be incurred by the supplier if their operations are disrupted. Therefore, the business owner does not possess the legally recognized relationship to the supplier’s property that would constitute insurable interest for insuring that property.

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 claim for one item could exhaust the majority of the policy’s coverage, which is a significant risk for the insurer, particularly concerning theft. The other options describe different policy features: ‘section limit’ applies to distinct sections of a policy (e.g., property damage vs. liability), ‘reinstatement insurance’ or ‘new for old’ cover means no depreciation is deducted, and ‘agreed value policies’ fix the sum insured based on expert valuation, typically for high-value items where depreciation is minimal.

This question tests the understanding of product development within the insurance industry, specifically focusing on how insurers adapt to market dynamics. Product research is the systematic process of identifying market needs, evaluating existing products, and developing new ones to remain competitive and relevant. This involves analyzing trends, competitor offerings, and customer feedback to innovate and refine insurance solutions. Options B, C, and D describe related but distinct activities. ‘Portfolio development’ refers to the creation of a package of products, ‘professional indemnity insurance’ is a specific type of coverage, and ‘reinsurance’ is a risk management tool for insurers, not a direct product development strategy.

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 at least seven years is a key regulatory obligation to ensure accountability and facilitate oversight.

The question tests the understanding of the minimum net asset requirements for an incorporated insurance broker. According to the regulations, an incorporated insurance broker must maintain a minimum net asset value of HK$100,000 and a minimum paid-up share capital of HK$100,000 at all times. Option A correctly states these requirements. Option B is incorrect because it only mentions net assets and not paid-up share capital. Option C is incorrect as it suggests a lower net asset requirement and no paid-up capital requirement. Option D is incorrect because it proposes higher figures for both net assets and paid-up capital than stipulated.

This question tests the understanding of how an agency agreement is terminated due to a fundamental breach by one of the parties. According to agency law principles, if either the principal or the agent commits a significant violation of the contract’s terms, the non-breaching party has the right to consider the agreement terminated. This termination can occur even if the contract has a fixed duration. The scenario describes a situation where an exclusive agent discovers the principal has appointed another agent, which is a violation of the exclusivity clause, a fundamental term. This allows the agent to end their performance and seek compensation for lost profits, as per the principles of contract law regarding breach.

The Insurance Ordinance mandates that authorized insurers maintain adequate reinsurance arrangements. This is a critical component of an insurer’s financial security and stability. The Insurance Authority (IA) oversees these arrangements, focusing on both the quantity and the collectability of the reinsurance. While the guideline on reinsurance with related companies specifically addresses transactions within a corporate group, the general requirement for adequate reinsurance applies to all authorized insurers to protect policyholders and ensure the long-term health of the insurance market. Therefore, ensuring sufficient and reliable reinsurance is a fundamental obligation.

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 case of the army officer killed by a train during wartime, means that the insurer is not liable even if the excluded peril (war) was only a remote or indirect cause of the loss. This broadens the exclusion beyond what ‘proximate cause’ alone might imply. Therefore, a loss where the excluded peril is a contributing factor, however minor or indirect, would be denied coverage under such wording.

The scenario describes an insurance agent meeting a client outside the usual office environment. The core principle being tested is the agent’s responsibility to protect the client’s personal data and ensure confidentiality. This aligns with the guidance provided for insurance agents and representatives handling customer data outside the workplace, emphasizing the need to prevent unauthorized access to sensitive information. Option (a) directly addresses this responsibility by highlighting the need to safeguard documents and ensure private conversations are not overheard, which is a fundamental aspect of data protection in such settings. Option (b) is incorrect because while customer consent is important, it doesn’t negate the primary duty of data protection during the meeting itself. Option (c) is irrelevant to the immediate situation of data handling during the meeting. Option (d) is also incorrect as the focus is on protecting data from third parties during the interaction, not on the internal policies of the institution regarding data storage, although those are also important.

Renewal of an insurance contract, as per the provided syllabus, legally constitutes the establishment of a new agreement. This means that upon renewal, the terms and conditions of the policy are subject to review and potential modification by the insurer, rather than simply continuing the existing contract unchanged. Therefore, an insurer can introduce new underwriting requirements or adjust premium rates based on current risk assessments and market conditions.

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 requirement to only offer advice within their expertise or to consult with their superiors if unsure, ensuring the client receives accurate and appropriate guidance. Options B, C, and D describe actions that are either not explicitly mandated in this context or are secondary to the core responsibility of providing competent advice.

This question tests the understanding of product development within the insurance industry, specifically focusing on how insurers adapt to market dynamics. Product research is the systematic process of identifying and evaluating new insurance products or enhancements to existing ones. This involves analyzing market trends, competitor offerings, and customer needs to ensure the insurer’s product portfolio remains competitive and relevant. Developing new forms of cover or a package of cover (portfolio development) is a direct outcome of effective product research. Options B, C, and D describe related but distinct concepts. Professional indemnity insurance covers negligence, which is a type of risk, not a product development strategy. Reinsurance is a risk transfer mechanism between insurers. The Hong Kong Professional Insurance Brokers Association is a regulatory body, not a product development function.

The question tests the understanding of how insurers might internally categorize their business operations. While regulatory classifications exist, insurers have flexibility in their internal structures. The U.S. style classification distinctly 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 options, where ‘Non-Life’ is a broad category that encompasses various types of insurance like motor, general liability, and property damage, which are distinct from life insurance. Option B is incorrect because while ‘Departmental’ is a classification method, it doesn’t specify the internal structure. Option C is incorrect as ‘Source of Business’ focuses on how business is acquired, not the type of insurance. Option D is incorrect because ‘Type of Client’ categorizes based on the customer (individual vs. firm), not the insurance product itself.

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. This definition explicitly includes both individual natural persons acting as agents and entities operating as insurance agencies (sole proprietorships, partnerships, or corporations). However, it specifically excludes Responsible Officers and Technical Representatives from this primary definition of an ‘Insurance Agent’ for the purposes of the Code, as they hold distinct roles within the agency structure.

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 designed to cover illegal activities would be void due to the illegality of its purpose.

The Independent Commission Against Corruption (ICAC) actively promotes ethical conduct and corruption prevention within the insurance industry. One of its key initiatives is the provision of educational resources and training tailored to insurance intermediaries. The ‘Practical Guide on Professional Ethics for Life Insurance Intermediaries,’ developed in collaboration with the Insurance Authority and industry bodies, aims to bolster vigilance against corruption and fraud, and to enhance the ethical management of staff. This aligns with the broader objective of reducing regulatory violations and fostering long-term success for insurance companies. Therefore, intermediaries are encouraged to familiarize themselves with this guide, along with relevant legislation and ICAC best practices, to proactively prevent corrupt activities.

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 them. Option C is incorrect as the Insurance Authority is the regulator, not an approved body of brokers. Option D is incorrect because while insurers are regulated, they are distinct from broker associations.

This question tests the understanding of the responsibilities of an authorized insurer concerning its members’ financial reporting and auditor reviews, as stipulated by relevant regulations. Specifically, it focuses on the insurer’s duty to ensure that its members submit their financial statements and auditor’s reports in compliance with the insurer’s membership rules and regulations. Furthermore, it highlights the insurer’s obligation to review these reports, paying close attention to any adverse statements or qualifications from the auditors, and to report any such findings. Option (a) accurately reflects this dual responsibility of receiving compliant financial statements and reviewing auditor reports for adverse findings, which is a core aspect of regulatory oversight for insurers.

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. Inward 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.

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 liability on a large portfolio of policies, which directly aligns with the definition of outward reinsurance.

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 syllabus. The other options represent different aspects of the insurance industry or related concepts but do not specifically describe the proactive development of new insurance offerings.

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 ability to limit an insurer’s premium income. This measure might be employed if the IA believes the insurer is expanding too rapidly, potentially leading to difficulties in managing the liabilities associated with new business. Other intervention powers include restricting investments, limiting new business capacity, appointing a trustee for asset custody, ordering special actuarial investigations, appointing a manager to assume control, or initiating winding-up proceedings.

The Conduct of Insurance Agents for General Insurance Business and Restricted Scope Travel Business mandates specific professional behaviours. Agents must only offer advice within their areas of expertise, ensuring they do not mislead clients with advice they are not qualified to give. It is crucial for agents to clearly identify themselves and the company they represent before engaging in any business discussions to maintain transparency. When comparing different policies, agents are required to explain the distinctions between them, not just highlight similarities or benefits. Furthermore, a fundamental duty is to clearly articulate the policy’s coverage and ensure the client comprehends what they are purchasing, thereby fulfilling the obligation of informed consent. Therefore, all four listed points are essential components of the required conduct.

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 notification requirements under the PDPO for direct marketing purposes.