IIQE Paper 1 Principles and Practice of Insurance Examination Quiz 26

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 that doesn’t fully cover the damage), the insured retains the right to recover the remaining portion of the loss from the third party. The insurer’s subrogation rights are limited to the amount they have paid. Therefore, if the insured successfully recovers the full loss from the negligent party, the insurer is entitled to reimbursement up to the amount they paid, and any excess recovery belongs to the insured. This aligns with the principle that subrogation is a mechanism to prevent unjust enrichment and to restore the insurer to the position they were in before the loss, but not to profit from it.

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. In contrast, for Long Term Business, the top ten insurers accounted for 75% of the market, and the top insurer held 16%. This higher concentration indicates that Long Term Business is less evenly distributed among authorized insurers compared to General Business. Therefore, the statement that General Business is more evenly distributed than Long Term Business is accurate based on the provided statistics.

The core of underwriting in general insurance, unlike life insurance, is its dynamic nature. Because general insurance policies are typically subject to renewal, an insurer has the opportunity to reassess the risk and adjust terms or even decline renewal based on evolving circumstances or claims history. This contrasts with life insurance, where the underwriting decision is largely fixed at inception and the insurer cannot unilaterally alter the terms or cancel the policy. Therefore, the ability to review and adjust terms at renewal is a key characteristic that makes general insurance underwriting less permanent in its initial assessment.

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 insurance company holds about them, and if they find it inaccurate, they can ask for it to be corrected. The example provided in the study material illustrates this by stating a customer has the right to ask an insurer to supply a copy of their personal data contained in their policy. Therefore, an insurance practitioner must facilitate such requests.

The Insurance Ordinance (Cap. 41) mandates that any entity wishing to conduct insurance business in or from Hong Kong must first obtain authorization from the Insurance Authority (IA). This authorization process involves meeting specific minimum requirements set by the Ordinance, which include aspects like paid-up capital, solvency margin, the suitability of directors and controllers, and adequate reinsurance arrangements. The IA also issues Guidelines to further assess an applicant’s financial soundness and ongoing suitability. Therefore, commencing insurance operations without this prior authorization from the IA is a violation of the regulatory framework.

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 a proposer must disclose facts that increase risk or affect premium calculation, they are not obligated to disclose facts that diminish the risk, assuming no specific inquiry is made about them. In this scenario, the automatic sprinkler system reduces the risk, and its non-disclosure, in the absence of a direct question, does not violate the duty of utmost good faith because it would have led to a lower premium, not a rejection of the risk or an increase in premium.

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 Conduct of Insurance Agents for General Insurance Business and Restricted Scope Travel Business mandates specific professional behaviours. Clause (i) emphasizes that agents should only offer advice within their areas of expertise, preventing misrepresentation and ensuring client suitability. Clause (ii) requires agents to clearly identify themselves and their affiliation before engaging in business discussions, promoting transparency and trust. Clause (iv) is crucial for consumer protection, obligating agents to thoroughly explain policy coverage and ensure the client comprehends the product they are purchasing, thereby fulfilling the duty of care. While explaining policy differences when making comparisons (iii) is good practice and often implied in providing clear advice, the core regulatory requirements focus on competence, identification, and ensuring client understanding of the specific product being sold. Therefore, (i), (ii), and (iv) are the most directly mandated elements for agents.

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 obligation can lead to consequences such as revocation of registration for a specified period, with additional requirements for re-registration. The IA’s Guidance Note outlines the assessment and record-keeping responsibilities for all parties involved in monitoring CPD compliance.

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 specifically listed as direct intervention powers in the context of managing rapid growth or potential difficulties arising from it. Restrictions on investments, custody of assets by a trustee, and special actuarial investigations are also intervention powers, but the limitation of premium income is the most direct response to concerns about the pace of growth and its potential impact on future liabilities.

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 ability to limit an insurer’s premium income. This measure is typically employed when the regulator believes an insurer might be expanding too rapidly, potentially leading to difficulties in managing the liabilities associated with new business. Other intervention powers include restricting investments, limiting new business capacity, appointing a trustee for assets, conducting special actuarial investigations, appointing a manager, or initiating winding-up proceedings.

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 take all reasonable measures to ensure these safeguards exist and to mitigate risks can lead to disciplinary actions by Relevant Authorities (RAs), such as pecuniary penalties. The other options describe offences or penalties under different ordinances or misrepresent the scope of the AMLO’s requirements.

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 principle is crucial for preventing unjust enrichment of the insured and for recovering the insurer’s payout. The insurer’s right to subrogation is not unlimited; it cannot recover more than the amount it has paid out in indemnity to the insured. This limitation ensures that the insured does not profit from the loss, and the insurer is made whole, but not more than whole. The question tests the understanding of the core principle of subrogation and its inherent limitations, specifically that the insurer’s recovery is capped at the indemnity amount paid.

The question tests the understanding of how insurers internally classify their business operations. While regulatory classifications exist (like those in the Insurance Ordinance), insurers have the freedom to organize their internal departments based on their specific needs. The U.S. style classification, which clearly separates Life and Non-Life business, with Non-Life further broken down into categories like Fire, Marine, Bonding, and Casualty, is a common and practical approach for internal management and operational efficiency. Classifying by source of business (agents, brokers, direct) or type of client (personal, commercial) are also valid internal methods, but the U.S. style departmental breakdown is a more comprehensive operational classification.

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 for the industry, the IARB specifically focuses on the conduct and registration of agents.

The scenario describes a situation where a customer is seeking clarification on policy terms and requesting a duplicate document. According to the provided 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 external communications, not direct customer requests for policy-related information or documents. Complaints handling is a separate function, though it may involve liaison with other departments. Therefore, the primary responsibility for addressing this customer’s needs falls under the Customer Servicing department.

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 judgment in deciding whether to accept the risk or in setting the premium. While the proposer has a duty to disclose, certain facts are exempt from this requirement when no inquiry is made. These exceptions include matters of common knowledge, facts already known or deemed known to the insurer, and facts that diminish the risk. In this scenario, the presence of an automatic sprinkler system is a fact that would likely reduce the risk and potentially influence the premium. Therefore, its non-disclosure, in the absence of a specific question about it, does not constitute a breach of the duty of utmost good faith.

The question tests the understanding of the definition of a ‘composite insurer’ under Hong Kong insurance regulations. A composite insurer is defined as an insurer that transacts both long-term business and general business. Option B is incorrect because it limits the scope to only one type of business. Option C is incorrect as it refers to a specific type of policy rather than the insurer’s overall business scope. Option D is incorrect because it describes a reinsurance arrangement, not the nature of the insurer’s primary business.

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 principal appointing a second agent while an exclusive agency agreement is still in effect, which constitutes a fundamental breach of the exclusivity clause. The agent, upon discovering this breach, can cease performing their duties and seek compensation for the loss of expected profits for the remaining term of the agreement. This aligns with the concept that a material breach allows the innocent party to end the contract and claim damages.

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 (e.g., a deductible or a limit on coverage), and the insured recovers an amount from a third party that covers the entire loss, the insurer is entitled to a proportionate share of that recovery. The insured retains any amount recovered that exceeds the total loss and the insurer’s payout. Therefore, if the insurer paid HK$80,000 on a HK$100,000 loss, and the insured recovers HK$90,000 from a negligent third party, the insurer is entitled to HK$80,000 of that recovery, leaving HK$10,000 for the insured. The insured would then still be out-of-pocket HK$10,000 for the remaining portion of the loss.

The scenario describes a situation where a customer service department is handling a request for a duplicate policy. According to the syllabus, the Customer Servicing section is responsible for handling documentation requests, such as providing duplicate policies. While public relations and marketing are also mentioned in the broader context of customer interaction and company image, and complaints handling is a distinct function, the specific task of issuing a duplicate policy falls under the documentation duties of customer service.

Non-fraudulent non-disclosure, a breach of utmost good faith, occurs when a party, without intent to deceive, fails to reveal material facts to another party. This is distinct from ordinary good faith, which only requires truthful answers to direct questions and does not mandate proactive disclosure of all known information. A participating policy is one where the policyholder receives a share of the insurer’s divisible surplus, typically as dividends. An offer, in contract law, is a proposal outlining the terms of a potential agreement. A surety is a guarantee of performance or debt, where the surety promises to pay the obligee if the principal fails to meet their obligation.

The Insurance Ordinance (Cap. 41) mandates that any entity wishing to conduct insurance business in or from Hong Kong must first obtain authorization from the Insurance Authority (IA). This authorization process involves meeting specific minimum requirements set by the Ordinance, which include aspects like paid-up capital, solvency margin, the suitability of directors and controllers, and adequate reinsurance arrangements. The IA also issues Guidelines to further assess an applicant’s financial soundness and ongoing suitability.

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 exclusively deals with reinsurance, which is a specific niche and not the definition of a composite insurer.

Guidance Note 4 (GN4) issued by the IARB (now part of HKFI) provides specific directives to ensure ethical conduct and customer protection in insurance sales. One of the key requirements is that insurance agents must not allow customers to sign blank or incomplete forms. Any modifications to policy documents must be initialed by the customer to prevent potential fraud or misrepresentation. This practice safeguards both the policyholder and the insurer by ensuring that all terms and conditions are clearly understood and agreed upon before signing.

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 addresses the conduct and registration of agents.

The question tests the understanding of how salvage value affects the indemnity provided by an insurance policy. 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 pay the full claim. In this scenario, the insurer chose the latter, meaning they paid the full repair cost and then benefited from selling the salvaged vehicle. Therefore, the $5,000 received from selling the salvaged car reduces the net cost of the loss for the insurer.

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 avoid it. Option (a) correctly identifies this characteristic. Option (b) describes an unenforceable contract, which is valid but cannot be enforced due to a procedural defect. Option (c) describes a void contract, which is invalid from the outset. Option (d) describes a valid contract, which is fully enforceable by both parties.

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, identified by letters A through I. Class F, Capital Redemption, specifically deals with contracts providing a capital sum at the end of a term to replace capital, and importantly, it is explicitly stated as not being related to human life. This distinguishes it from other long-term business categories like Life and Annuity (Class A), Marriage and Birth (Class B), Linked Long Term (Class C), Permanent Health (Class D), Tontines (Class E), and various Retirement Scheme Management categories (G, H, I), all of which are intrinsically linked to human life events or longevity. Therefore, a contract designed solely to provide a capital sum at a future date, independent of any human life contingency, falls under the Capital Redemption classification.

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 encompasses the intent and knowledge regarding the use of property for terrorist acts, making option (a) the most comprehensive and direct definition of terrorist financing.