IIQE Paper 1 Principles and Practice of Insurance Examination Quiz 27

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 when advising clients. Failure to do so, leading to a client’s loss, can constitute professional negligence. In contrast, an insurance agent’s primary responsibility is to the insurer, and their duty of care to the policyholder is generally considered lower unless they profess specialized skills. Consequently, insurance agents are not typically mandated to carry professional indemnity insurance, whereas brokers are, to cover potential claims arising from such negligence.

The Insurance Ordinance (Cap. 41) mandates specific minimum paid-up capital requirements for insurers operating in Hong Kong. For an insurer conducting only general business or only long-term business, but not any statutory (compulsory) insurance business, the minimum paid-up capital is HK$10 million. If the insurer engages in any statutory (compulsory) insurance business, regardless of whether it also conducts other types of insurance business, the minimum paid-up capital requirement increases to HK$20 million. Therefore, an insurer solely focused on long-term business, without engaging in compulsory insurance, needs HK$10 million.

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.

The question tests the understanding of policy provisions that can lead to a payout exceeding the actual loss incurred (i.e., more than indemnity). ‘New for Old’ cover means that if an item is damaged or destroyed, it is replaced with a new item, regardless of the age or depreciation of the original. This often results in a payout greater than the depreciated value of the lost item. Agreed value policies fix the value of the insured item at the commencement of the policy. If the item is lost or destroyed, the insurer pays the agreed value, which might be higher than the market value at the time of the loss. Reinstatement insurance allows the insured to replace the lost or damaged item with a new one of similar kind and quality, which can also result in a payout exceeding the depreciated value. The condition of average, however, is a limiting condition. It applies when the sum insured is less than the value of the property at the time of the loss, and it reduces the claim payment proportionally. Therefore, it prevents a payout exceeding indemnity.

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 contraction of malaria, is discovered after the policy has been accepted but before it commences, and the policy terms are silent on this specific point, the proposer is not obligated to disclose it at common law. However, insurers typically include policy wordings that exclude pre-existing conditions, allowing them to deny claims based on the exclusion rather than a breach of utmost good faith.

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 vigilant about suspicious circumstances, doubtful documentation, or verbal cues that suggest a claim is not legitimate. 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 suspicions, while (b) and (c) describe actions that could be considered assisting fraud or overstepping their role. Option (d) is too passive and doesn’t reflect the proactive duty to report.

This question assesses the understanding of the role of an accountant within an insurance company, specifically focusing on the critical function of managing company assets. While record-keeping, collections, and payments are all vital accounting functions, the prompt highlights the accountant’s responsibility for the care and placement of company assets, particularly when a dedicated investment department is absent. This responsibility is paramount for ensuring the security of funds, achieving competitive returns, and maintaining sufficient liquidity to meet financial obligations, all of which are crucial for the insurer’s solvency and operational continuity. The other options represent important but distinct accounting functions that do not directly encompass the strategic management of company investments.

The Insurance Authority (IA) mandates specific minimum requirements for individuals seeking to operate as insurance brokers or to be appointed as Chief Executives of insurance broking firms. These requirements are designed to ensure competence and professionalism within the industry. One crucial aspect is the need for a minimum educational standard, which is Form 5 or its equivalent, and the applicant must be at least 21 years old. Beyond these foundational criteria, the IA specifies either acceptable insurance qualifications coupled with two years of management experience in the insurance sector, or, in the absence of such qualifications, a minimum of five years of insurance industry experience with at least two years in a management role. Furthermore, for those dealing with long-term or investment-linked insurance products, passing the relevant IIQE paper is mandatory unless an exemption applies. Therefore, a candidate must meet these stipulated educational, age, and experience benchmarks, along with any specific examination requirements, to be considered for authorization.

The Insurance Ordinance mandates that authorized insurers maintain adequate reinsurance arrangements. This is a critical component of an insurer’s financial security and is subject to supervisory review by the IA regarding both the quantity and the collectability of the reinsurance. The Guideline on Reinsurance with Related Companies specifically addresses situations where an insurer reinsures with a related entity, aiming to ensure that the insurer’s prudent control over its reinsurance is not compromised, thereby protecting the insuring public. Therefore, the IA’s assessment of reinsurance adequacy is a key aspect of its financial supervision.

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 regulatory framework, the IARB specifically focuses on the conduct and registration of agents themselves.

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 concerning the acts disclosed. The question describes a scenario where an insurance intermediary facilitates a transaction for a known terrorist associate. While the intermediary might have collected property, the critical failure under UNATMO, which carries a significant penalty, is making property or financial services available to such an individual. Reporting to the JFIU is a defence against such an offence, not a primary obligation that, if missed, constitutes the offence itself. The offence of failing to disclose knowledge or suspicion of terrorist property is separate and carries a lesser penalty. ‘Tipping off’ relates to prejudicing an investigation after a disclosure has been made. Therefore, the most direct contravention described is making services available to a terrorist associate.

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.

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) Code of Conduct outlines the criteria for determining if an individual is fit and proper to be registered. Clause 6/31 (ix) specifically states that a person must have passed the relevant papers of the Insurance Intermediaries Qualifying Examination (IIQE) recognized by the IA, unless exempted. This demonstrates a fundamental requirement for demonstrating competence and knowledge in the insurance field, which is a key aspect of being fit and proper. While other factors like compliance history and age are important, the IIQE qualification is a direct measure of the necessary knowledge base.

This question assesses the understanding of the role of an accountant within an insurance company, specifically focusing on the critical function of managing company assets. While record-keeping, collections, and payments are all vital accounting functions, the prompt highlights the accountant’s responsibility for the care and placement of company assets, particularly when a dedicated investment department is absent. This responsibility is paramount for ensuring the financial health and stability of the insurer, directly impacting its security, potential returns, and liquidity to meet financial obligations. Therefore, the investment of company assets is the most significant responsibility from the perspective of the accountant’s role in safeguarding the insurer’s financial well-being.

The Insurance Ordinance explicitly 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 within the insurance industry. While an individual might be involved in other capacities, such as a director, the key restriction is on directly acting as both an agent and a broker, especially when providing advice to clients. Therefore, an individual who is an appointed insurance agent cannot also be an authorised insurance broker.

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 existing registration lapses. Options B, C, and D suggest periods that are either too short or too long, potentially leading to gaps in registration or unnecessary administrative burdens.

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 an indemnity, 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 this scenario, while both policies cover the same property and the same peril (fire), they are insuring different interests: the owner’s interest in the building and the tenant’s interest in their stock. Since the interests covered are different, contribution between the insurers will not apply. Therefore, each insurer is liable for the full amount of the loss they cover, up to their respective policy limits.

The question tests the understanding of the minimum net asset requirements for different types of insurance brokers in Hong Kong, as stipulated by relevant regulations. An unincorporated insurance broker is required to maintain a minimum net asset value of HK$100,000 at all times. An incorporated insurance broker has a dual requirement: a minimum net asset value of HK$100,000 and a minimum paid-up share capital of HK$100,000. Therefore, the statement that an incorporated insurance broker must maintain a minimum paid-up share capital of HK$100,000 is correct.

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 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 the scenario, Mr. Chan’s consistent allowance of Ms. Lee to handle client communications and sign documents, without explicit repudiation, creates a representation to clients that she is his authorized agent. Therefore, he would be estopped from denying her agency when a client relies on this perceived authority.

The Insurance Complaints Committee (ICCB) Panel has the authority to review complaints against insurers. While the policy terms generally prevail, the Panel can override them if they lead to an unfair or unreasonable outcome for the complainant. This power is exercised in conjunction with adherence to general principles of good insurance practice, applicable laws, and guidelines from bodies like the Hong Kong Federation of Insurers (HKFI). The Code of Conduct for Insurers, particularly Part III on Claims, is a key reference for assessing fairness in claim handling. Therefore, the Panel’s decision-making process involves a holistic review that can extend beyond a literal interpretation of the policy contract to ensure equitable treatment of policyholders.

This question tests the understanding of an insurer’s obligations regarding the financial health and compliance of its members, as stipulated by relevant regulations. Specifically, it focuses on the requirement for an insurer to verify that its members have submitted their financial statements and auditor’s reports as per the membership rules. The correct answer highlights the insurer’s responsibility to ensure these submissions are received and that the auditor’s reports contain no adverse statements or qualifications beyond those already noted by the insurer itself. This demonstrates a proactive approach to risk management and regulatory compliance, ensuring the overall financial stability and integrity of the group.

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’ compensation insurers, not motor insurance. Option (d) is incorrect because the Insurance Claims Complaints Bureau (ICCB) handles complaints against insurers and intermediaries, not directly compensating victims of uninsured drivers.

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, casualty, and marine 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.

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 an indemnity, cover the same interest affected, cover the same peril causing the loss, cover the same subject matter, and each policy must be liable for the loss (i.e., not subject to an exclusion that prevents contribution). In this scenario, while both policies cover the same peril (fire) and the same subject matter (stock-in-trade), they cover different interests: the merchant’s interest as owner and the warehouse operator’s interest as a bailee. Therefore, criterion (b) – covering the same interest – is not met, and contribution between the insurers will not apply.

The Personal Data (Privacy) Ordinance (PDPO) mandates that data users ensure data processors protect personal data. While contracts are a primary method, the PDPO allows for ‘other means’ of compliance. This flexibility acknowledges that not all data processing relationships can be governed by formal contracts. ‘Other means’ can include non-contractual oversight and auditing mechanisms, demonstrating that the data user is actively monitoring the data processor’s adherence to data protection requirements, even in the absence of a direct contractual agreement. Options B, C, and D describe specific contractual obligations or good practices, but not the alternative compliance method allowed by the Ordinance.

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 are distinct functions. Complaints handling is a separate responsibility. Therefore, the primary responsibility for addressing these customer needs falls under Customer Servicing.

Guidance Note 4 (GN4) issued by the IARB (now part of HKFI) provides specific directives for insurance agents to uphold integrity and protect policyholders. A key requirement is that agents must not accept blank or incomplete proposal forms from clients. Any necessary amendments to a form must be initialed by the customer to ensure transparency and prevent unauthorized alterations. This practice safeguards against potential misrepresentation or forgery, thereby protecting the insuring public.

The Insurance Agents Registration Regulation (Cap. 31 sub. leg. A) mandates that insurance agents must be registered with the Insurance Authority. This registration is a prerequisite for legally conducting insurance agency business in Hong Kong. While insurers have a responsibility to ensure their agents comply with laws and codes, and agents must understand products and customer rights, the fundamental requirement for an individual to act as an insurance agent is their registration.

The scenario describes a situation where a customer is seeking clarification on their existing motor insurance policy, specifically requesting a duplicate policy document and an amendment to their coverage details. According to the provided syllabus, the Customer Servicing department is responsible for handling such requests, which fall under the category of ‘Documentation’. This includes providing duplicate policies and processing amendments to existing policies. While public relations and handling complaints are also functions of customer service, they are not the primary functions described in this specific scenario. Marketing and promotion are separate functions, although customer interactions can influence public perception.