IIQE Paper 1 Principles and Practice of Insurance Examination Quiz 31

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 insurers are regulated, the question specifically asks about approved bodies of brokers. Option C is incorrect as the Insurance Authority is the regulator, not an approved body of brokers itself. Option D is incorrect because while client accounts are important for brokers, it’s a requirement for their operation, not the definition of an approved body.

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, the broader requirement to establish and maintain proper safeguards to mitigate ML/TF risks encompasses these and other preventative measures. The Drug Trafficking (Recovery of Proceeds) Ordinance (DTROP) and the Organized and Serious Crimes Ordinance (OSCO) deal with the proceeds of drug trafficking and indictable offences respectively, and while related to combating financial crime, they do not represent the primary overarching duty of FIs under the AMLO concerning risk mitigation.

The question tests the understanding of ‘Renewal’ in the context of insurance contracts as defined by the IIQE syllabus. Renewal of an insurance contract is legally considered the creation of a new contract, rather than a simple continuation of the old one. This distinction is important for understanding the terms, conditions, and potential changes that can occur at each renewal period. The other options describe different concepts: ‘Replacement’ involves substituting a damaged item, ‘Risk Transfer’ is about shifting the financial burden of risk, and ‘Responsible Officer’ refers to an individual overseeing agency conduct.

This question tests the understanding of an agent’s duty of care and skill. An agent is expected to exercise reasonable care and skill in performing their duties. While the law doesn’t demand perfection, a failure to meet this standard can lead to the principal reclaiming losses from the agent. In this scenario, the agent’s failure to renew the policy due to oversight, despite having the funds, demonstrates a lack of reasonable care and skill, making the principal liable for the loss caused by the lapse in coverage and allowing the principal to seek recourse from the agent.

This question tests the understanding of the Insurance Authority’s (IA) oversight responsibilities concerning the financial health and compliance of licensed insurers, specifically focusing on the requirements for receiving and reviewing financial statements and auditor’s reports from member entities. The Insurance Ordinance and related regulations mandate that the IA must ensure insurers are financially sound and compliant. A key aspect of this oversight involves verifying that the insurer has obtained the necessary financial statements and auditor’s reports from its members, as stipulated by the insurer’s own membership rules and regulations. Furthermore, the IA expects the insurer to have reviewed these reports, paying particular attention to any adverse statements or qualifications from auditors regarding financial statements or minimum requirements. The absence of such adverse findings, or the proper listing of any exceptions, is crucial for demonstrating the insurer’s internal controls and the financial stability of its members. Therefore, the insurer’s ability to confirm receipt and satisfactory review of these documents is a fundamental compliance requirement.

This question tests the understanding of apparent authority in agency law, specifically how a principal’s past conduct can create an impression of authority in the agent towards third parties. The scenario describes an agent who has previously been permitted by the principal to engage in certain transactions (accepting cargo risks for West Africa) despite an express prohibition. When the agent continues this practice, the principal is bound not because the agent had actual authority (as they were expressly forbidden), but because the principal’s prior actions created an appearance of authority in the eyes of the third party. This is the essence of apparent authority, which protects third parties who reasonably rely on the principal’s representations or conduct. Option B is incorrect because while ratification involves retrospective approval, it’s a specific act of confirmation, not an ongoing impression created by conduct. Option C is incorrect because actual authority, whether express or implied, stems from the principal’s direct communication or conduct towards the agent, not the impression given to third parties. Option D is incorrect because ostensible authority is synonymous with apparent authority, but the explanation focuses on the mechanism of how it arises from the principal’s conduct, making apparent authority the more direct concept being tested in this context.

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 one where there is only the possibility of loss or no loss, with no chance of gain. Speculative risk involves the possibility of both gain and loss. Fundamental risk affects a large segment of the population or economy, while particular risk affects only individuals or specific groups. The scenario describes a situation where a business might face a loss of its inventory due to a fire, which is a classic example of a pure risk as there is no potential for financial gain from the event itself, only the possibility of financial loss.

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. If a material fact, such as the discovery of malaria, comes to the insured’s knowledge after the policy has been accepted but before it commences, and the policy terms are silent on this specific point, the common law position is that there is no obligation to disclose it. The insurer might, however, rely on policy exclusions for pre-existing conditions. Disclosure is typically required for changes in risk during the policy term if the policy explicitly mandates it, or when a contract alteration is requested, or upon renewal.

The question tests the understanding of the concept of ‘Agency by Estoppel’ as defined in contract law within the insurance context. 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 this scenario, Mr. Chan’s consistent allowance of Ms. Lee to present herself as his representative, coupled with his inaction when she solicits business, creates a representation to potential clients like Ms. Wong. Therefore, Mr. Chan would be bound by Ms. Lee’s actions under the principle of Agency by Estoppel, making him liable for the misrepresentation.

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. Firstly, it must inform its relevant authority (RA) about this non-compliance. Secondly, 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 actively manages the heightened risks.

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. 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, the question pertains to brokers’ representative organizations.

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 at the proposal stage, decides to treat it as void. Option (b) describes a void contract, which is invalid from the outset. Option (c) describes an unenforceable contract, which is valid but cannot be enforced due to a procedural defect. Option (d) describes a valid contract, which is not the scenario presented.

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. Therefore, ‘Long Term Business’ is the correct counterpart to ‘General Business’ as defined by the Ordinance.

The question tests the understanding of the Motor Insurers’ Bureau of Hong Kong (MIB) and its role in compensating victims of motor vehicle accidents. The MIB is funded by a surcharge on motor insurance premiums and specifically aims to provide compensation when compulsory insurance is absent, ineffective, or the insurer is in liquidation. Option (a) correctly identifies the MIB’s funding mechanism and its purpose in addressing gaps in compulsory motor insurance coverage. Option (b) is incorrect because while the MIB deals with motor accidents, its primary focus is on compensating victims when insurance is lacking or ineffective, not on general road safety campaigns. Option (c) is incorrect as the Employees’ Compensation Insurer Insolvency Bureau (ECIIB) deals with insolvency of employers’ liability insurers, not motor insurance. Option (d) is incorrect because the Insurance Claims Complaints Bureau (ICCB) handles complaints against insurers and their representatives, not compensation for victims of uninsured motorists.

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 to denote the share of profits allocated to policyholders. These bonuses can be paid out in various ways, such as cash payments, reducing future premiums, or increasing the sum assured. Therefore, bonuses are the direct manifestation of profit sharing in participating policies.

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.

The question tests the understanding of market concentration in Hong Kong’s insurance sector, specifically differentiating between General Business and Long Term Business. The provided text indicates that in General Business, the top ten insurers held a 42% market share, with no single insurer exceeding 17% in any class. This suggests a more fragmented market. Conversely, for Long Term Business, the top ten insurers held 75% of the market, and the top one held 16%. This higher concentration, particularly the significant share of the top players, implies a less evenly distributed market compared to General Business. Therefore, General Business is considered more evenly distributed among authorized insurers.

This question tests the understanding of an insurance intermediary’s role in preventing corruption and fraud, specifically in relation to the ICAC’s services and the ‘Practical Guide on Professional Ethics for Life Insurance Intermediaries’. The ICAC offers free and confidential corruption prevention services, including best practice packages and advice. The ‘Practical Guide’ was developed in collaboration with the Insurance Authority and industry bodies to enhance vigilance against corruption and strengthen ethical conduct management. Therefore, intermediaries are encouraged to familiarize themselves with the Ordinance, ICAC best practices, and the ‘Practical Guide’ to prevent corrupt conduct. Option A correctly identifies these key resources and actions.

The question tests the understanding of the concept of ‘Agency by Estoppel’ as defined in contract law relevant 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 belief, the principal is prevented (estopped) from denying the existence of the agency relationship, even if no actual agency was granted. This is distinct from apparent authority, where the principal grants the agent more authority than they actually possess, but the agency itself exists. In this scenario, Mr. Chan’s consistent allowance of Ms. Lee to present herself as his representative, coupled with his inaction when she made representations to clients, creates the impression of agency. Therefore, he would be estopped from denying her authority when a client, relying on these representations, enters into a contract. The other options describe different legal concepts: ‘Apparent Authority’ involves a principal manifesting authority to a third party, but the agency relationship itself is not necessarily in question as it is with estoppel. ‘Agency’ is a general term for a principal-agent relationship, which may or may not be established by estoppel. ‘Principal and Agent Relationship’ is too broad and doesn’t capture the specific legal mechanism at play.

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), their recovery from a third party is limited to the amount they have paid. If the recovery from the third party exceeds the insurer’s payout, the excess belongs to the insured. In this scenario, the insurer paid HK$80,000 for a loss of HK$100,000. The subrogated recovery is HK$90,000. The insurer is entitled to recover only the amount they paid, which is HK$80,000. The remaining HK$10,000 (HK$90,000 recovery – HK$80,000 payout) rightfully belongs to the insured, as it represents the portion of the loss that the insurer did not cover.

This question tests the understanding of the fundamental principle of indemnity in insurance, specifically how it applies to the valuation of a loss. The principle of indemnity aims to restore the insured to the financial position they were in immediately before the loss occurred, without allowing for a profit or a greater loss. In the context of property insurance, this is typically achieved by assessing the market value of the damaged or destroyed item at the time of the loss. Replacement cost, while sometimes an option, is not the universal or primary method of indemnity. Actual cash value (ACV) is a common method that accounts for depreciation, reflecting the item’s value at the time of loss. Agreed value is used for specific items where market value is difficult to ascertain, and it’s agreed upon beforehand. Therefore, the most accurate representation of how indemnity is typically achieved in property insurance is by considering the value at the time of the loss, which often involves accounting for depreciation.

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 regulation aims to ensure that intermediaries clearly represent either the insurer (as an agent) or the policyholder (as a broker), rather than attempting to serve both capacities, which could compromise their professional integrity and the advice provided to clients. Therefore, an individual acting as an appointed insurance agent for one insurer cannot also be an authorised insurance broker.

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 an uninsured interest in the property or has not been fully indemnified, the insurer’s subrogation rights are correspondingly limited.

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. This principle ensures that the legal system does not lend its authority to agreements that undermine societal order or statutory provisions. Therefore, a contract to sell counterfeit goods, which is an illegal activity, would be void due to a breach of the legality requirement.

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 in this context. 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.

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. Option C is incorrect as the salvage value is accounted for in the indemnity calculation, not ignored. Option D is incorrect because while the insured might be compensated for the loss, the salvage value is a crucial component in determining the net indemnity.

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 aware of and have easy access to the process for lodging complaints.

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 RP fails to provide proof of compliance when requested, and future re-registration will be contingent on submitting such proof.

The Insurance Authority (IA) is responsible for overseeing the conduct of insurance intermediaries. When an applicant for registration as a Registered Person is undergoing the approval process, the appointing Principal or Insurance Agent has a duty to inform the IA of any changes in the applicant’s circumstances that might influence the IA’s decision. This proactive disclosure is crucial for maintaining the integrity of the registration process and ensuring that only fit and proper individuals are registered. Failure to provide such information could lead to the application being rejected or, if registered, potential disciplinary action.

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 occupation, especially one that significantly alters the risk profile, falls under this requirement. Therefore, the insured is obligated to inform the insurer about this change to uphold the principle of utmost good faith as stipulated in the policy, even though at common law, such a disclosure might only be required at renewal.