IIQE Paper 1 Principles and Practice of Insurance Examination Quiz 28

The principle of insurable interest is fundamental to the validity of an insurance contract. It requires that the policyholder must have a legally recognized financial stake in the subject matter of the insurance. This means that the policyholder would suffer a direct financial loss if the insured event occurs. For instance, a person has an insurable interest in their own life, their spouse’s life (often presumed by law), and their property. A creditor generally has an insurable interest in the life of their debtor, but not necessarily in the debtor’s property unless it’s collateral. The scenario describes a situation where a person has a financial relationship with a property but no legal claim or ownership over it. Therefore, they cannot insure it because they would not suffer a direct financial loss if the property were damaged or destroyed, as their interest is not legally recognized in relation to the property itself.

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 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 specifies a higher net asset requirement and an incorrect paid-up capital amount.

The Insurance Ordinance mandates that authorized insurers maintain adequate reinsurance arrangements. This is a crucial aspect of financial security, especially when dealing with related reinsurers, as it can potentially compromise prudent control. The Insurance Authority (IA) has issued a specific guideline to address supervisory concerns in such situations, aiming to ensure that reinsurance arrangements with related companies are considered adequate by the IA in terms of financial security. This guideline is designed to protect the interests of the insuring public by ensuring proper oversight of these arrangements.

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 a third party, even if the agent’s actions contravene express instructions. The scenario describes an agent who, despite being prohibited from accepting certain risks, has repeatedly done so with the principal’s subsequent issuance of policies. This consistent behaviour by the principal, in honouring the agent’s unauthorized actions, leads the third party to reasonably believe the agent possesses the authority to accept such risks. This is the essence of apparent authority, which binds the principal to the third party, irrespective of the internal agreement between the principal and agent. Option B is incorrect because actual authority refers to the authority expressly or impliedly granted by the principal to the agent, which is not the case here. Option C is incorrect as ratification is a subsequent approval of an act done without prior authority, whereas apparent authority arises from the principal’s conduct that leads a third party to believe the agent has authority. Option D is incorrect because ostensible authority is a synonym for apparent authority, but the explanation focuses on the *creation* of this impression through the principal’s actions, making the concept of apparent authority the more direct and accurate answer in this context.

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 Anti-Money Laundering and Counter-Terrorist Financing (Financial Institutions) Ordinance (AMLO) imposes specific obligations on Financial Institutions (FIs) regarding customer due diligence and record-keeping. Section 23 of Schedule 2 of the AMLO mandates that FIs must implement robust safeguards to prevent breaches of Parts 2 and 3 of Schedule 2 and to mitigate risks associated with money laundering and terrorist financing (ML/TF). Failure to do so, particularly if an FI knowingly contravenes a specified provision, can lead to criminal penalties, including imprisonment and fines. Disciplinary actions by Relevant Authorities (RAs) can also be taken, which may include pecuniary penalties. The Drug Trafficking (Recovery of Proceeds) Ordinance (DTROP) and the Organized and Serious Crimes Ordinance (OSCO) also criminalize dealing with proceeds of drug trafficking or indictable offences, respectively, and failure to report suspicions. However, the AMLO’s specific requirement for FIs to take all reasonable measures to prevent contraventions and mitigate risks is the most direct answer related to the proactive measures an FI must undertake to ensure compliance with the broader regulatory framework concerning ML/TF.

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 thoroughly understanding the client’s situation and recommending a product that genuinely fits. Simply presenting a policy without this due diligence, even if it meets some superficial criteria, would be a breach of this conduct requirement.

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.

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 the property on behalf of the owners 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 the policy would be valid as long as the owners had insurable interest at the policy’s commencement.

The core of underwriting in general insurance involves a continuous assessment of risks. Unlike life insurance, where underwriting is a singular event at policy inception, general insurance policies are subject to periodic review at renewal. This allows the insurer to adjust terms, premiums, or even decline renewal based on the evolving risk profile or claims experience of the insured. Therefore, the ability to modify or terminate coverage at renewal is a key characteristic that distinguishes general insurance underwriting from life insurance.

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 breach allows the agent to end the contract and potentially seek compensation for lost profits, aligning with the concept of termination due to a fundamental breach.

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 because of policy terms (like a deductible or a specific limit), and the insured recovers an amount from a third party that covers the entire loss, the insurer is entitled to a share of that recovery. This share is proportional to the insurer’s contribution to the loss. The insured retains any amount recovered that exceeds the total loss, and if the insurer’s payment was less than the full loss, the insured is entitled to a portion of the subrogation proceeds to cover their unreimbursed loss before the insurer receives their share. Therefore, if the insurer paid HK$8,000 on a HK$10,000 loss, and the insured recovers HK$12,000 from the negligent third party, the insurer is entitled to HK$8,000 (their indemnity payment). The remaining HK$4,000 belongs to the insured, as it covers their unreimbursed HK$2,000 loss and provides a surplus. The insurer cannot claim the entire HK$12,000, nor can they claim more than they paid out. The insured is not entitled to the full recovery as it would mean they are over-indemnified.

This question tests the understanding of non-fraudulent non-disclosure, which is a breach of the duty of utmost good faith. This occurs when a party, without intent to deceive, fails to reveal material facts to another party. In the context of insurance, the insured has a duty to disclose all material facts to the insurer. Failing to do so, even if unintentional or due to negligence, can invalidate the policy. Option B describes ordinary good faith, which only requires truthful answers to direct questions. Option C describes the role of an obligee in a suretyship, which is unrelated to disclosure duties in insurance contracts. Option D describes the concept of a ‘peril’ as the cause of loss, which is also distinct from disclosure obligations.

The question tests the understanding of a registered person’s duty to act in good faith and with integrity, as well as their obligation to cooperate with the relevant authorities and principals in case of a complaint. Specifically, it highlights the process of handling complaints, where the initial point of contact for a complainant should be the Principal or Insurance Agent. If the complainant remains unsatisfied, they then have the option to escalate the matter to the IARB. This reflects the tiered approach to complaint resolution designed to ensure efficiency and proper channels are followed.

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 from a train accident, even if the officer was on duty due to wartime conditions, would be excluded if the policy contained this wording. The other options describe situations that are either not covered by this specific wording or misinterpret its effect.

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.

The scenario describes a situation where a policy exclusion for losses ‘directly or indirectly’ caused by war is invoked. The key legal interpretation of ‘directly or indirectly’ in such exclusions is that it broadens the scope of the exclusion to cover even remote or consequential links to the excluded peril. In the given case, while the train accident was the immediate cause of death, the wartime context (supervising guarding duties during wartime) established an indirect link to war. Therefore, the insurer is able to deny the claim based on the ‘directly or indirectly’ wording, as it encompasses indirect causation.

The Anti-Money Laundering and Counter-Terrorist Financing Ordinance (AMLO) imposes specific obligations on Financial Institutions (FIs) to prevent money laundering and terrorist financing. Section 23 of Schedule 2 of the AMLO mandates that FIs must implement robust safeguards to ensure compliance with Parts 2 and 3 of Schedule 2 and to effectively mitigate money laundering and terrorist financing risks. This includes establishing internal controls and procedures. Failure to implement such measures can lead to disciplinary actions by Relevant Authorities (RAs), including pecuniary penalties. The Drug Trafficking (Recovery of Proceeds) Ordinance (DTROP) and the Organized and Serious Crimes Ordinance (OSCO) also contain provisions related to reporting and dealing with proceeds of drug trafficking and indictable offences respectively, with specific penalties and defences. However, the question specifically asks about the proactive measures an FI must take to prevent contraventions and mitigate risks, which is directly addressed by the AMLO’s requirement for proper safeguards.

The duty of utmost good faith, which includes the duty of disclosure, generally applies to material facts known to the proposer at the time of entering into the insurance contract. If a material fact comes to the proposer’s knowledge after the contract has been concluded, and the policy terms are silent on this matter, there is no obligation to disclose it under common law. In this scenario, the medical examination revealing malaria occurred after the policy was accepted. Therefore, the insured is not legally obligated to disclose this finding to the insurer based on the common law duty of utmost good faith, assuming the policy doesn’t have specific clauses to the contrary.

The Insurance Authority (IA) mandates that travel insurance agents, their responsible officers, and technical representatives 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 consequences such as the revocation of registration for a specified period, with additional requirements for re-registration. The IA’s Guidance Note provides details on how compliance is assessed and the responsibilities for record-keeping and monitoring.

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 identification of unusual activities by understanding customer behavior and transaction patterns. Therefore, an FI’s internal systems and staff training are paramount in preventing the offense of tipping off, as mandated by anti-money laundering regulations.

The Employees’ Compensation Insurance Residual Scheme Bureau (ECIRS Bureau) was established to address situations where employers, particularly those in high-risk occupations, faced difficulties in securing Employees’ Compensation (EC) insurance. It functions as a market of last resort, ensuring that such employers can obtain the mandatory EC insurance. This is achieved through a market agreement where all EC insurers are members of the ECIRS and collectively share the risks. The ECIRS Bureau oversees the operation of this scheme, fulfilling its purpose of providing access to EC insurance for employers who would otherwise be unable to obtain it.

This question tests the understanding of non-fraudulent non-disclosure, which is a breach of the duty of utmost good faith. This occurs when a party, without intent to deceive, fails to reveal material facts to another party. In the context of insurance, the insured has a duty to disclose all material facts to the insurer. Failing to do so, even if unintentional or due to negligence, can invalidate the policy. Option B describes ordinary good faith, which only requires truthful answers to direct questions. Option C describes the role of a surety in a suretyship agreement, which is unrelated to disclosure duties in insurance contracts. Option D refers to the concept of a ‘peril’ in insurance, which is the cause of a loss, not a disclosure obligation.

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 Mr. Chan has a financial interest in the success of his friend’s business, this is not a direct legal relationship to the business’s assets or operations that would entitle him to insure them. His interest is indirect and based on the potential for his friend to repay a loan, not on ownership or a direct financial stake in the business itself. Therefore, he lacks the legally recognized relationship required for insurable interest in the business’s premises.

The Insurance Authority (IA) and the Insurance Agents Registration Board (IARB) assess whether an individual is ‘fit and proper’ to be registered as an insurance intermediary. A key aspect of this assessment involves reviewing past conduct. Specifically, the Code of Conduct for Persons Licensed by the IA (the Code) outlines grounds for deeming a person not fit and proper. Clause 6/31 (viii) explicitly states that a person being found not to have complied with or to be in breach of the Code or the rules of the Hong Kong Federation of Insurers (HKFI) is a factor the IARB will consider. This directly addresses the scenario where an individual has previously failed to adhere to regulatory requirements.

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 the insurer in exchange for a premium. The other options represent ancillary benefits or broader economic impacts, not the fundamental role of insurance.

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 Insurance Authority (IA) mandates that insurance brokers must submit annual audited financial statements and an auditor’s report within six months of their financial year-end. This auditor’s report specifically confirms adherence to minimum requirements, including those related to financial soundness and operational capabilities, as outlined in the regulatory framework. While a broker must disclose their registration number upon request and on business cards, and provide a Customer Protection Declaration for new long-term policies, these are distinct obligations from the annual financial reporting and auditor’s confirmation of meeting minimum standards.

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. According to the principles of proximate cause, if an uninsured peril leads to an insured peril, and the insured peril then causes the loss, the loss is generally recoverable. In this scenario, the accidental fire (insured peril) caused water damage (uninsured peril), which then led to further damage from a subsequent electrical surge (another uninsured peril). The key is that the initial insured peril (fire) was the proximate cause that initiated the chain of events. The subsequent uninsured perils, while contributing to the overall damage, do not break the chain of causation originating from the insured peril. Therefore, the loss is recoverable because the proximate cause was an insured peril (fire), even though other uninsured perils followed.