IIQE Paper 1 Principles and Practice of Insurance Examination Quiz 29

The principle of insurable interest is fundamental to insurance contracts, ensuring that the policyholder suffers a financial loss if the insured event occurs. This requires a legally recognized relationship between the policyholder and the subject matter of the insurance. In the context of a loan, a creditor has a direct financial stake in the debtor’s continued ability to repay. If the debtor’s life is insured and the debtor passes away, the creditor’s financial interest is directly impacted as the debt may become unrecoverable. Therefore, a creditor possesses an insurable interest in the life of their debtor, as stipulated by insurance principles and regulations designed to prevent wagering contracts. The other options do not represent a direct, legally recognized financial stake that would qualify for insurable interest in this scenario.

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 legal framework for the industry, the IARB’s specific mandate is agent registration and conduct.

This question tests the understanding of the fundamental principles of risk management and insurance, specifically the classification of risks. A ‘pure risk’ is defined as a situation where there is only the possibility of loss or no loss, with no chance of financial gain. Conversely, a ‘speculative risk’ involves the possibility of gain as well as loss. ‘Particular risk’ refers to a risk that affects only an individual or a small group, while ‘fundamental risk’ affects a large segment of society or the economy. Therefore, a risk that presents only the potential for loss, without any possibility of a positive financial outcome, is categorized as a pure risk.

The question tests the understanding of the minimum net assets requirement for an incorporated insurance broker. According to the provided syllabus information, an incorporated insurance broker must maintain a minimum net assets value of HK$100,000 and a minimum paid-up share capital of HK$100,000 at all times. Therefore, if an incorporated insurance broker has a paid-up share capital of HK$150,000, they are meeting this requirement. The net assets value is determined by excluding intangible assets and using generally accepted accounting principles. The scenario states the broker has net assets of HK$80,000. Since net assets must be at least HK$100,000, this broker is not compliant. The options provided are designed to test if the candidate understands both the net asset and paid-up capital requirements and can apply them to a given scenario. Option A is incorrect because while the paid-up capital is sufficient, the net assets are not. Option C is incorrect as it focuses only on the paid-up capital and ignores the net asset requirement. Option D is incorrect because it misinterprets the net asset requirement and suggests a lower threshold.

The Conduct of Insurance Agents for General Insurance Business and Restricted Scope Travel Business mandates specific professional behaviours. Agents are required to only offer advice within their areas of expertise, ensuring they possess the necessary knowledge and qualifications. It is fundamental for an agent to clearly identify themselves and their affiliation before engaging in any business discussions with a potential client. When comparing different insurance policies, agents must meticulously explain the distinctions in coverage, terms, and conditions to avoid misleading the client. Furthermore, a core responsibility is to clearly articulate the policy’s coverage details and ensure the client comprehends what they are purchasing, thereby upholding the principle of utmost good faith and transparency. Therefore, all four listed points are essential components of an agent’s conduct.

The scenario describes an insurance agent who is also licensed as a travel agent and wishes to engage in restricted scope travel insurance business. According to the provided text, an insurance agent engaging in restricted scope travel business must be licensed as a travel agent under the Travel Agents Ordinance. This requirement is explicitly stated in section 6.2.2(f)(x) of the Code. Therefore, the agent must possess this additional license to legally conduct this specific type of business.

This question tests the understanding of the fundamental difference in the nature of underwriting between life insurance and general insurance. In life insurance, underwriting is a singular, critical event because the insurer cannot cancel the policy once issued, making the initial risk assessment paramount. Conversely, general insurance policies are typically subject to renewal, allowing the insurer to re-evaluate the risk and adjust terms or even decline renewal if circumstances change. This inherent flexibility in general insurance means that underwriting, while still important, is not as irrevocably final as in life insurance, allowing for less centralized control.

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, resulting in financial loss, can constitute professional negligence. This duty of care is more stringent than that of an insurance agent, whose primary responsibility is to the insurer and who may not profess the same level of specialized expertise to the policyholder. Consequently, insurance brokers are typically required to maintain Professional Indemnity Insurance to cover potential claims arising from such negligence, whereas insurance agents are not statutorily mandated to do so.

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 indemnity (not a benefit), cover the same interest affected, cover the same peril causing the loss, cover the same subject matter of insurance, and each policy must be liable for the loss (i.e., not subject to an exclusion that prevents contribution). In the scenario provided, while both policies cover the same property and the same peril (fire), they cover different interests: one covers the merchant’s interest as owner, and the other covers the warehouse operator’s interest as a bailee. Since the policies do not cover the same interest, the condition for contribution is not met, and therefore, contribution does not apply between the insurers.

This question tests the understanding of how subrogation proceeds are shared when the recovery from a negligent third party exceeds the total loss suffered by the insured. In the ‘Excess’ method of subrogation sharing, the insurer is typically reimbursed first for the amount they paid out. If the recovery is more than what the insurer paid, the excess amount goes to the insured until they are made whole for their uninsured portion of the loss. In this scenario, the insured’s loss was $10,000, and the insurer paid $40,000. The total loss is $50,000. The recovery is $45,000. The insurer is entitled to be repaid the $40,000 they paid. The remaining $5,000 ($45,000 – $40,000) then goes to the insured to cover their $10,000 uninsured portion of the loss. Therefore, the insured receives $5,000 and the insurer receives $40,000.

This question tests the understanding of how proximate cause operates when multiple perils are involved, specifically focusing on the relationship between insured and uninsured perils in a causal chain. The scenario describes a sequence of events starting with negligence (an uninsured peril) leading to a collision, then fire, then explosion, and finally water damage. The key principle here, as illustrated in the provided text, is that if an uninsured peril leads to an insured peril, and that insured peril then causes the loss, the loss is generally recoverable under the policy covering the insured peril. In this case, the water damage is the direct result of leaks caused by the explosion, which was triggered by the fire, which in turn was caused by the collision initiated by negligence. The illustration explicitly states that ‘the water damage is regarded as a result of its sole insured peril, notwithstanding that this peril can be traced backward to an uninsured peril.’ Therefore, the fire (an insured peril in the second policy) is considered the proximate cause of the damage, even though it was preceded by negligence. The other options are incorrect because they misinterpret the application of proximate cause. Option B is wrong because it incorrectly assumes the uninsured peril (negligence) directly causes the loss without the intervening insured peril. Option C is incorrect as it suggests the loss is irrecoverable simply because an uninsured peril initiated the chain, ignoring the principle of intervening insured perils. Option D is incorrect because it misapplies the concept of concurrent causes, as the perils here occur sequentially, not simultaneously.

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.

This question tests the understanding of an insurance intermediary’s role in preventing corruption and fraud, specifically concerning their interaction with clients and third parties. The ICAC provides resources like the ‘Practical Guide on Professional Ethics for Life Insurance Intermediaries’ to guide intermediaries. The core principle is that intermediaries must actively guard against violating relevant ordinances and report any suspected corruption. Option A correctly identifies the proactive measures an intermediary should take, aligning with the ICAC’s guidance on vigilance and ethical conduct. Option B is incorrect because while reporting is important, it’s not the sole preventative measure; active guarding against violations is also crucial. Option C is too narrow, focusing only on internal company policies and not the broader interaction with external parties. Option D is incorrect as it suggests a passive approach of merely being aware, rather than actively preventing violations.

The principle of utmost good faith in insurance mandates that all material facts must be disclosed by the proposer to the insurer. A material fact is defined as any circumstance that would influence a prudent insurer’s decision regarding accepting the risk or setting the premium. While common knowledge and facts already known to the insurer are exceptions, a fact that reduces the risk, such as the presence of a sprinkler system, is still considered relevant to the insurer’s assessment of the risk and premium calculation, even if it lowers the risk. Therefore, failing to disclose it, even if it benefits the insurer by potentially leading to a higher premium than otherwise, is a breach of utmost good faith. The question tests the understanding that disclosure is required for any fact influencing the insurer’s judgment, not just those that increase the risk or premium.

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.

The scenario describes a situation where a customer is seeking clarification on policy terms and requesting a duplicate document. According to the syllabus, the Customer Servicing department is responsible for handling various types of enquiries, including those seeking guidance and information, as well as requests for documentation like duplicate policies. While public relations and marketing are also mentioned, they focus on broader company image and promotional activities. Complaints handling is a distinct function. Therefore, the primary responsibility for addressing the customer’s needs in this scenario falls under the Customer Servicing department’s purview.

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, and at the inception of the policy for life insurance. 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 grants it an 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 this insurance is valid because it is acting on behalf of the owners who possess the primary insurable interest.

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, meaning it cannot profit from the recovery. While subrogation can arise from various legal bases, including tort, contract, and statute, its core purpose is to transfer the insured’s recovery rights to the insurer.

The Insurance Ordinance strictly prohibits an individual from simultaneously holding the roles of an appointed insurance agent and an authorised insurance broker. This is to prevent potential conflicts of interest and ensure clear lines of responsibility in the insurance market. Therefore, if an individual is an appointed insurance agent for Insurer X, they cannot also be an authorised insurance broker, even if they are dealing with different clients or different types of insurance products. The prohibition applies regardless of whether the clients are the same or different.

The principle of utmost good faith in insurance mandates that both parties, particularly the proposer, must disclose all material facts that could influence a prudent insurer’s decision regarding acceptance of the risk or the premium setting. A material fact is defined as any circumstance that would influence a prudent insurer’s judgment. While a proposer must disclose facts that increase risk or affect premium, they are not obligated to disclose facts that diminish the risk, unless specifically asked. The presence of an automatic sprinkler system, as described, would reduce the risk and potentially the premium. Therefore, its non-disclosure in the absence of an inquiry does not breach the duty of utmost good faith.

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.

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.

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 question tests the understanding of the primary function of insurance as a risk transfer mechanism. While insurance does contribute to employment, financial services, and economic development, its core purpose is to shift the potential financial burden of a loss from an individual or entity to an insurer in exchange for a premium. The other options represent ancillary benefits or broader economic impacts, not the fundamental role of insurance.

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.

This question tests the understanding of an insurance intermediary’s role in preventing and reporting insurance fraud, specifically concerning fraudulent claims. While an intermediary is not a law enforcement officer, they have a duty not to assist in fraud and to report suspicions. This includes being aware of suspicious circumstances, questionable documentation, or verbal cues that suggest a claim might be fraudulent. The key is to assist the insurer and the law in combating fraud, but with sensitivity, as the insurer is primarily responsible for investigating and alleging fraud. Option (a) correctly identifies the intermediary’s obligation to report suspicious claims, while (b) and (c) describe actions that could be considered assisting fraud or overstepping their role, and (d) is too general and doesn’t specifically address the intermediary’s duty regarding claims.

This question tests the understanding of how proximate cause operates when multiple perils are involved, specifically focusing on the relationship between insured and uninsured perils in a causal chain. The scenario describes a sequence of events starting with negligence (an uninsured peril) leading to a collision, then fire, then explosion, and finally water damage. The key principle here, as illustrated in the provided text, is that if an uninsured peril leads to an insured peril, and that insured peril then causes the loss, the loss is generally recoverable under the policy covering the insured peril. In this case, the water damage is the direct result of leaks caused by the explosion, which was triggered by the fire, which in turn was caused by the collision initiated by negligence. The illustration explicitly states that ‘the water damage is regarded as a result of its sole insured peril, notwithstanding that this peril can be traced backward to an uninsured peril.’ Therefore, the fire, being an insured peril in the second policy, is considered the proximate cause of the damage that ultimately resulted from the chain of events initiated by negligence.

The core principle here is that financial institutions (FIs) must establish robust internal controls to prevent their employees, including appointed insurance agents, from engaging in ‘tipping off’ customers or other individuals about suspicious activity investigations. This involves training staff to recognize unusual transactions by understanding customer behavior and to conduct customer due diligence (CDD) in a manner that avoids inadvertently revealing an ongoing investigation. The FI is responsible for ensuring its staff are adequately trained and aware of the risks associated with tipping off, especially when a suspicion of money laundering or terrorist financing (ML/TF) has been formed. Therefore, an FI must ensure its internal systems and staff training are designed to prevent such disclosures.

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. The other options describe different policy features: ‘reinstatement insurance’ and ‘new for old’ cover relate to how claims are settled without deductions for depreciation, and ‘section limit’ applies to specific sections within a policy that cover different types of risks or subject matter.

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 crucial aspect of regulatory compliance, ensuring accountability and the ability to investigate past activities if necessary. Therefore, the primary purpose of these record-keeping requirements is to ensure transparency, financial integrity, and auditability of the broker’s operations.