IIQE Paper 1 Principles and Practice of Insurance Examination Quiz 30

An insurance broker has a fundamental duty to act in the best interests of their clients. This principle, often referred to as placing client interests above all other considerations, is a cornerstone of ethical conduct in the insurance industry. Limiting a client’s choice of insurers without a valid reason would directly contravene this duty by potentially preventing the client from securing the most suitable coverage. The other options, while potentially relevant to an insurance broker’s responsibilities, do not represent a direct breach of the primary duty to prioritize the client’s interests in the selection of insurance providers.

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 provide requested documentation to the Insurance Authority (IA) regarding their Continuing Professional Development (CPD) compliance. According to the provided text, specifically referencing the consequences of non-compliance with CPD requirements, an RP who fails to respond to a request from the IA to produce proof of compliance should have their registration revoked for a specified period determined by the IA. Furthermore, their future registration applications will not be processed until proof of compliance is provided. Option (a) accurately reflects this consequence, emphasizing the specified period of revocation and the prerequisite for future applications. Option (b) is incorrect because while revocation is a consequence, the duration is not fixed at three months; it’s specified as ‘a specified period of time as determined by the IARB’. Option (c) is incorrect as a false declaration leads to a different, longer initial revocation period (12 months) and the scenario does not mention a false declaration, but a failure to respond. Option (d) is incorrect because while re-registration requires completing outstanding CPD hours, the primary immediate consequence for failing to respond to a request for proof is the revocation of registration, not just a requirement to complete hours.

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 direct ownership, its contractual authority and responsibility to manage and protect the property on behalf of the owners grants it a form of insurable interest as an agent. This interest is derived from the principal’s (the owners’) insurable interest. Therefore, the property management company can insure the building, and the policy would be valid because the insurable interest originates from the owners, even if the company is named as the insured.

The question tests the understanding of the renewal period for an Officer/Technical Representative’s registration. According to the provided syllabus, the registration for an Officer/Technical Representative can be renewed not earlier than three months before its current expiry. This ensures that the registered person has sufficient time to complete any required Continuing Professional Development (CPD) and to meet the ‘fit and proper’ criteria before the current registration lapses, maintaining compliance with regulatory requirements.

The question tests the understanding of the minimum paid-up capital requirements for authorized insurers in Hong Kong, specifically differentiating between general business, long term business, and composite insurers. The provided text states that a general business insurer requires HK$10 million in paid-up capital. A long-term business insurer requires HK$2 million. A composite insurer, which carries on both general and long-term business, requires HK$20 million. A captive insurer has a lower requirement of HK$2 million. Therefore, an insurer carrying on both general and long-term business must meet the higher requirement of HK$20 million.

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 sell counterfeit goods, which is an illegal activity, would render the contract unenforceable due to a breach of the legality requirement.

An insurance broker has a fundamental duty to prioritize their client’s interests above all other considerations. This principle is paramount when providing advice or arranging insurance. Limiting a client’s choices of insurers without a valid reason would directly contravene this duty by potentially steering the client away from the most suitable options, thereby not placing the client’s interests first. While maintaining good relationships with insurers is important, it should not come at the expense of the client’s best interests. Similarly, ensuring compliance with regulations and accurately completing documentation are crucial, but they are secondary to the primary obligation of client advocacy.

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 has the power to report breaches of the Insurance Ordinance or the Code to the Insurance Authority (IA) if a registered person is found to be unfit to be registered. Therefore, all these functions fall within the purview of the IARB’s responsibilities.

The question tests the understanding of the ‘Fitness and Properness’ criteria for registered persons, as outlined in Part E of the Code of Practice for the Administration of Insurance Agents. Specifically, it focuses on the implications of a group of companies for an insurance intermediary. According to the provided text, for the purposes of clause 2.2(b) of the Code of Practice, a ‘Group of Companies’ refers to a relationship where companies are subsidiaries of a holding company or are subsidiaries of each other. This definition is crucial for determining if an intermediary operating within such a structure meets the required fitness and properness standards, as regulatory oversight often extends to the entire group. Therefore, understanding the definition of a group of companies in this context is essential for compliance.

The Insurance Ordinance in Hong Kong categorizes insurance business into Long Term Business and General Business. Long Term Business is further subdivided into nine classes, including Life and Annuity (Class A), Marriage and Birth (Class B), Linked Long Term (Class C), Permanent Health (Class D), Tontines (Class E), Capital Redemption (Class F), and three categories for Retirement Scheme Management (Classes G, H, and I). General Business is divided into seventeen classes, such as Accident, Sickness, Land Vehicles, Railway Rolling Stock, Aircraft, Ships, and Goods in Transit. The question tests the understanding of this statutory classification by presenting a scenario involving a policy that provides benefits upon the birth of a child, which falls under the ‘Marriage and Birth’ category (Class B) within Long Term Business.

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.

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 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.

Principle 6 of the Personal Data (Privacy) Ordinance (PDPO) grants data subjects the right to access and correct their personal data. This means an individual can request a copy of the information an insurer holds about them, and if they find it inaccurate, they can ask for it to be corrected. This right is fundamental to ensuring data accuracy and transparency in data handling practices.

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 as per membership rules and to review these reports for any adverse statements or qualifications. The correct answer highlights the insurer’s obligation to verify the receipt of these documents and to ensure that any auditor qualifications are properly disclosed in the insurer’s own report, aligning with the principles of financial oversight and regulatory compliance within the insurance sector.

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 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.

The Insurance Authority (IA) mandates that insurance brokers must submit their annual audited financial statements and an auditor’s report within six months of their financial year-end. This report confirms adherence to minimum requirements, including those related to financial soundness and operational capabilities. Failure to submit these documents within the stipulated timeframe constitutes a breach of statutory obligations, which can impact an insurance broker’s fitness and propriety to conduct business. The question tests the understanding of these regulatory submission deadlines and their implications for an insurance broker’s compliance.

The Insurance Claims Complaints Bureau (ICCB) is a key external dispute resolution body for policyholders in Hong Kong. Its panel is empowered to make awards against insurers. The maximum award amount is HK$800,000. Importantly, insurers cannot appeal an award made by the panel. However, a complainant who is dissatisfied with an award retains the right to pursue legal recourse.

This question tests the understanding of how salvage value impacts the indemnity provided by an insurer. When damaged property has a residual value, 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 damaged item, or the insurer can take possession of the salvage and dispose of it, paying the full loss amount. Both methods aim to prevent the insured from profiting from the loss and ensure the indemnity does not exceed the actual loss suffered.

An insurance broker, by holding themselves out as an expert, owes a higher duty of care to their clients. This means they must exercise reasonable skill and diligence in advising clients, and failure to do so can lead to professional negligence. The Personal Data (Privacy) Ordinance mandates that data users, including insurance practitioners, must adhere to data protection principles. Principle 1 specifically requires that personal data be collected lawfully and fairly, and that data subjects be informed about the purpose of collection and to whom their data might be disclosed. Therefore, an insurance broker failing to provide a Personal Information Collection Statement (PICS) when collecting client data would be in breach of this principle, in addition to potentially being liable for professional negligence if this oversight leads to client harm.

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, disclosing 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.

The question tests the understanding of the minimum paid-up capital requirements for authorized insurers in Hong Kong, specifically differentiating between general business, long-term business, and composite insurers. The provided text states that a general business insurer requires HK$10 million in paid-up capital, while a long-term business insurer requires HK$2 million. A composite insurer, which carries on both general and long-term business, must meet the higher requirement for general business, which is HK$10 million. The scenario describes an insurer conducting both types of business, thus falling under the composite category. Therefore, the minimum paid-up capital required is HK$10 million.

This question tests the understanding of vicarious liability in the context of data protection. Under the Personal Data (Privacy) Ordinance (PDPO), a data user is generally held responsible for the actions of their data processor when personal data is outsourced. The Ordinance holds the data user liable as the principal for any wrongful acts or practices of the authorized data processor that infringe upon a data subject’s privacy. While the data processor is not directly liable to the data subject, the data user remains accountable. The contract between the data user and data processor can serve as evidence of compliance with data protection principles, but it does not absolve the data user of their primary responsibility to the data subject.

The scenario describes a situation where an insurer uses the phrase ‘directly or indirectly’ in an exclusion clause. This wording is interpreted by courts to broaden the scope of the exclusion, meaning that even a remote or indirect link to the excluded peril will prevent recovery. In the given case, the war was an indirect cause of the officer’s death, as he was killed by a train while on duty during wartime. However, because the exclusion covered losses ‘directly or indirectly caused by war,’ the insurer was able to deny the claim, as the war was a contributing factor, however remote.

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 court case involving the army officer, broadens the scope of the exclusion. It means that even if the excluded peril (war) was only a remote or indirect cause of the loss (death by train), the exclusion would still apply. Therefore, a loss indirectly caused by war would be excluded under such wording, making the insurer not liable. The other options are incorrect because ‘directly caused by’ and ‘proximately caused by’ are generally interpreted to mean the same as simply ’caused by’, adhering to the standard proximate cause rules. ‘Loss caused by delay, even though the delay be caused by a risk insured against’ is a specific exclusion related to delay, not the general ‘directly or indirectly’ wording.

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 premiums based on current risk assessments and market conditions.

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 legal framework for the industry, the IARB is specifically tasked with the registration and conduct oversight of agents.

The question tests the understanding of the definition of a ‘composite insurer’ as per Hong Kong insurance regulations. A composite insurer is defined as an insurer that transacts both long-term and general insurance business. Option B is incorrect because it limits the scope to only one type of business. Option C is incorrect as it refers to an insurer that only handles claims, not the underwriting of different business types. Option D is incorrect because it describes an insurer that only deals with reinsurance, which is a specific segment of the insurance market.

Principle 6 of the Personal Data (Privacy) Ordinance grants data subjects the right to access and correct their personal data. This means an individual can request a copy of the information an insurance company holds about them, and if they find it inaccurate, they can ask for it to be corrected. This right is fundamental to ensuring data accuracy and transparency in data handling practices.

This question tests the understanding of the responsibilities of an authorized insurer concerning its members’ financial reporting and auditor reviews, as stipulated by relevant Hong Kong insurance regulations. Specifically, it focuses on the insurer’s duty to ensure it has received financial statements and auditor’s reports from its members, and that these reports are free from adverse statements or qualifications, unless explicitly noted. The correct answer highlights the insurer’s obligation to verify the adequacy and compliance of these reports according to membership rules and regulations, and to confirm that no unlisted adverse findings exist in the auditors’ reviews of members’ financial statements and minimum requirements.