IIQE Paper 1 Principles and Practice of Insurance Examination Quiz 23

The Insurance Authority (IA) is responsible for overseeing the conduct of insurance intermediaries. When an applicant for registration as a Registered Person is undergoing the approval process, the appointing Principal or Insurance Agent has a duty to inform the IA of any changes in the applicant’s circumstances that might influence the IA’s decision. This proactive disclosure is crucial for maintaining the integrity of the registration process and ensuring that only fit and proper individuals are registered. Failure to provide such information could lead to the application being rejected or, if registered, potential disciplinary action.

This question tests the understanding of vicarious liability in the context of data protection under Hong Kong law. The Personal Data (Privacy) Ordinance (PDPO) holds data users responsible for the actions of their data processors. Therefore, if a data processor infringes on a data subject’s privacy, the data subject can seek recourse from the data user, who is considered liable as the principal for the data processor’s wrongful acts. The contract between the data user and data processor can serve as evidence of compliance, but it does not absolve the data user of their primary responsibility to the data subject. The data processor itself is not directly liable to the data subject for infringing their privacy.

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 definition encompasses both the direct provision of funds for terrorism and the collection of funds for individuals known or suspected to be involved in terrorism. Option (b) accurately reflects the act of making property or financial services available to a terrorist or associate, knowing or being reckless as to their status. Option (c) focuses solely on the collection or solicitation of funds for such individuals, which is a component but not the entirety of the definition. Option (d) describes the process of disguising the origin of funds through complex transactions, which is characteristic of money laundering, not terrorist financing itself, although the two can be intertwined.

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 states that in General Business, the top ten insurers held a 42% market share, with no single insurer exceeding 17% in any class. Conversely, for Long Term Business, the top ten insurers accounted for 75% of the market, the top five for 55%, and the top one for 16%. This clearly indicates that Long Term Business is significantly more concentrated among fewer insurers compared to General Business, which is described as more evenly distributed. Therefore, the statement that Long Term Business exhibits higher market concentration is accurate.

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, thus exceeding pure indemnity. Agreed value policies fix the value of the insured item at the outset of the policy. If the item is a total loss, 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 property with new property of a similar kind and quality, which can also result in a payout exceeding the depreciated value of the original. The condition of average, conversely, is a condition that limits the payout to the proportion that the sum insured bears to the actual value of the property, thereby preventing over-insurance and ensuring indemnity, not exceeding it.

The scenario describes an insurance practitioner who, upon changing employers, copies customer policy information from their previous firm. This action directly violates the principle of lawful and fair means of data collection and the prohibition against using data for purposes beyond its original collection intent. Specifically, copying customer data from a former employer to market new products constitutes a misuse of personal data and a breach of data protection principles, as the original purpose of data collection was for the former employer’s business, not for the new employer’s marketing efforts. This is a key consideration under Hong Kong’s data protection laws, emphasizing that personal data should only be used for the purpose for which it was collected, unless specific consent is obtained or other legal justifications exist.

This question tests the understanding of reinsurance from the perspective of an insurer. Outward reinsurance is when an insurer transfers some of its risk 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 risk from other insurers, acting as a reinsurer itself. Therefore, an insurer seeking to reduce its own risk burden would engage in outward reinsurance.

An insurance broker has a fundamental duty to prioritize their client’s interests above all other considerations. This principle is paramount in all dealings, including advice and the arrangement of insurance contracts. Limiting a client’s choices of insurers without a valid reason would contravene this duty by potentially prejudicing the client’s ability to secure the most suitable coverage. Similarly, being overly reliant on a single insurer could lead to a lack of objective advice, as the broker’s own business interests might inadvertently influence recommendations. Therefore, maintaining independence and offering a broad spectrum of options are crucial for upholding the client’s best interests.

The question tests the understanding of market concentration in Hong Kong’s insurance sector, specifically distinguishing between General Business and Long Term Business. The provided text states that for General Business, the top ten insurers held a 42% market share, and no single insurer exceeded 17% in any major class. In contrast, for Long Term Business, the top ten insurers accounted for 75% of the market, the top five for 55%, and the top one for 16%. This indicates a significantly higher concentration in Long Term Business compared to General Business, where the market is more evenly distributed among authorized insurers. Therefore, the statement that Long Term Business exhibits greater market concentration is accurate.

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, doubtful documentation, or verbal cues that suggest a claim might be fraudulent. The key is to assist the insurer and the law in resisting and revealing 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, aligning with their duty to assist in combating fraud. Option (b) is incorrect because while intermediaries should maintain good business practices, diligence in record-keeping is a general good practice, not specifically a direct response to suspected fraudulent claims. Option (c) is incorrect as the intermediary’s primary role is not to investigate claims like a detective, but to report suspicions. Option (d) is incorrect because while integrity is paramount, it’s a broader ethical principle; the specific action related to fraudulent claims is reporting suspicions.

The Personal Data (Privacy) Ordinance (PDPO) in Hong Kong is designed to protect the privacy of individuals by regulating the collection, holding, processing, and use of their personal data. This legislation applies broadly across both the public and private sectors, encompassing any entity that handles personal data. Therefore, the Ordinance’s provisions are not limited to one sector but extend to all organizations and individuals involved in data processing activities within Hong Kong’s jurisdiction.

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 responsible party bears the cost. The insurer’s right to subrogation is limited to the amount they have paid out as indemnity. Therefore, if the insurer paid HK$50,000 for a loss caused by a third party, they can only recover up to HK$50,000 from that third party, even if the total loss was greater.

The question tests the understanding of the minimum paid-up capital requirements for authorized insurers in Hong Kong, specifically for a captive insurer. According to the provided text, a captive insurer has a minimum paid-up capital requirement of HK$2 million. The other options represent different scenarios or incorrect figures. HK$20 million is for carrying on both General and Long Term business, HK$10 million is the minimum for General Business (unless carrying on statutory insurance business), and HK$5 million is not a specified minimum capital requirement in the provided context.

This question tests the understanding of the fundamental requirement of insurable interest in insurance contracts, as stipulated by Hong Kong insurance law. Insurable interest means a legally recognized relationship between the policyholder and the subject matter of insurance, such that the policyholder would suffer a financial loss if the insured event occurs. Without this legally recognized connection, the insurance contract is void. A mere financial expectation or a relationship that doesn’t confer a legal right to the subject matter is insufficient. For instance, while a spouse is presumed to have an insurable interest in their partner’s life, a business partner generally does not have an insurable interest in the other partner’s life unless there’s a specific financial arrangement like a buy-sell agreement that creates a legally recognized financial dependency on that life.

This question tests the understanding of how proximate cause operates in insurance when multiple perils are involved, specifically focusing on the relationship between insured and uninsured perils in a causal chain. 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 master’s negligence (uninsured peril) caused a collision, which in turn caused a fire (insured peril). The fire then led to an explosion and subsequent water damage. The key is that the fire, an insured peril, was a direct cause in the chain of events leading to the water damage. Therefore, the loss is recoverable under the policy that covers fire, even though the initial cause was negligence.

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, not to general compliance with anti-money laundering guidelines. Therefore, while adhering to the IA’s Guideline on AML/CFT is crucial for overall compliance and risk mitigation, it does not directly confer a statutory defence against the specific offences outlined in UNATMO concerning the provision or collection of property for terrorist purposes. The defence is tied to the act of reporting suspicious activities to the JFIU.

The Personal Data (Privacy) Ordinance (PDPO) mandates that data users ensure data processors protect personal data. While contracts are the 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 that effectively monitor the data processor’s adherence to data protection requirements, thereby fulfilling the data user’s obligation under the Ordinance.

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, custody of assets by a trustee, and special actuarial investigations are distinct regulatory tools.

The Insurance Authority (IA) is responsible for overseeing the conduct of insurance intermediaries. When an applicant for registration as a Registered Person is undergoing the approval process, the appointing Principal or Insurance Agent has a duty to inform the IA of any changes in the applicant’s circumstances that might influence the IA’s decision. This proactive disclosure is crucial for maintaining the integrity of the registration process and ensuring that only fit and proper individuals are registered. Failure to provide such information could lead to the application being rejected or, if registered, potential disciplinary action.

The Insurance Authority (IA) mandates that travel insurance agents, their responsible officers (ROs), and technical representatives (TRs) 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 revocation of registration. Specifically, a first-time failure to meet CPD hours typically results in a 3-month revocation, with a requirement to complete outstanding hours upon re-registration. Making a false declaration regarding CPD hours carries a more severe penalty of a 12-month revocation, also requiring completion of outstanding hours for re-registration. Non-response to requests for proof of compliance will also lead to revocation for a period determined by the Insurance Authority (IA), and future applications will not be processed without proof of compliance.

This question tests the understanding of vicarious liability in the context of data protection under Hong Kong law. The Personal Data (Privacy) Ordinance (PDPO) holds data users responsible for the actions of their data processors. Therefore, if a data processor infringes on a data subject’s privacy, the data subject can seek recourse from the data user, who is considered liable as the principal for the data processor’s wrongful acts. The contract between the data user and data processor can serve as evidence of compliance, but it does not absolve the data user of their primary responsibility to the data subject. The data processor itself is not directly liable to the data subject for infringing their privacy.

Guidance Note 4 (GN4) issued by the IARB (now part of the HKFI) provides specific directives on ethical conduct for insurance agents. A key principle highlighted is the prohibition of accepting blank or incomplete proposal forms from clients. This rule is in place to safeguard policyholders from potential misrepresentation or fraudulent activities. Any necessary amendments to a form must be explicitly acknowledged and initialed by the customer to ensure transparency and consent. Therefore, an agent who asks a client to sign a form that is not fully completed is acting contrary to this guidance.

The Code of Practice for the Administration of Insurance Agents defines an ‘Insurance Agent’ broadly to encompass individuals and agencies acting on behalf of insurers. Crucially, it explicitly excludes ‘Responsible Officers’ and ‘Technical Representatives’ from this definition, as these roles are defined separately and have specific responsibilities within the framework of the Code. Therefore, a person solely acting as a Technical Representative, even if advising on or arranging insurance contracts, is not classified as an ‘Insurance Agent’ under the Code’s primary definition.

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 void it. Option (a) accurately describes this situation where a contract is valid until the insured party, upon discovering a material omission at the proposal stage, decides to treat it as void. Option (b) describes an unenforceable contract, which is valid but cannot be enforced due to a procedural defect, not a fundamental flaw at inception. Option (c) describes a void contract, which is invalid from the outset and has no legal effect. Option (d) describes a valid contract, which is fully enforceable by both parties.

This question tests the understanding of the fundamental principles of risk management and insurance, specifically the distinction between different types of risks. A pure risk is one where there is only the possibility of loss or no loss, with no chance of gain. Speculative risk involves the possibility of both gain and loss. Fundamental risk affects a large segment of the population or economy, while particular risk affects only individuals or specific groups. The scenario describes a situation where a business might face a loss (e.g., damage to property) but has no potential for financial gain from the event itself, fitting the definition of a pure risk.

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 represent different interpretations or scenarios not supported by the provided text regarding the ‘directly or indirectly’ exclusion.

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 different category.

The Insurance Agents Registration Regulation (Cap. 31 sub. leg. K) mandates that insurance agents must be registered with the Insurance Authority. This registration is a prerequisite for legally conducting insurance business in Hong Kong. While insurers have a responsibility to ensure their agents comply with laws and codes, and while agents must adhere to ethical practices and product understanding, the fundamental requirement for an individual to act as an insurance agent is their official registration.

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), 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 if the recovery is insufficient to cover both the insurer’s payout and the insured’s remaining loss, the insured typically has priority for the recovered funds up to the total amount of their loss. In this scenario, the insurer paid HK$50,000 of a HK$80,000 loss. The third party’s negligence caused the entire HK$80,000 loss. The insurer’s subrogation right allows them to pursue the negligent party for the HK$50,000 they paid. If the recovery from the third party is HK$60,000, the insurer is entitled to HK$50,000 of this recovery, as it is the amount they paid out. The remaining HK$10,000 would go to the insured, who still has an uninsured loss of HK$30,000 (HK$80,000 total loss – HK$50,000 insurer payout). Therefore, the insurer can recover up to the amount they indemnified, which is HK$50,000.

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.