IIQE Paper 1 Principles and Practice of Insurance Examination Quiz 22

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 situations where the property is actually used for terrorism and also where it is intended for such use, even if it is not ultimately deployed. Option (b) describes making property or services available to a known or recklessly considered terrorist or associate, which is a related but distinct offense. Option (c) focuses solely on the collection or solicitation of funds for a terrorist or associate, omitting the crucial element of intention or knowledge regarding the use of the property for terrorist acts. Therefore, the most comprehensive and accurate definition aligns with the provision or collection of property with the specific intent or knowledge of its use in terrorist acts.

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 separate investment department is absent. This responsibility is paramount for ensuring the security of funds, achieving a reasonable return on investment, and maintaining sufficient 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 health.

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.

The question tests the understanding of a registered person’s obligations when assisting a potential policyholder with a proposal form. According to the regulations, a registered person must refrain from influencing the applicant and must clearly state that the responsibility for the answers lies with the applicant. Additionally, they must explain the consequences of fraud, non-disclosure, and inaccuracies, drawing the applicant’s attention to the relevant sections of the form. Option (a) accurately reflects these dual responsibilities of ensuring applicant autonomy and informing them of potential repercussions.

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 and ensure the client comprehends the benefits and limitations of the product they are purchasing. Therefore, all four listed points are essential components of the conduct expected of insurance agents in these business areas.

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 confirm the client’s comprehension of what they are purchasing, thereby upholding the principle of utmost good faith and ensuring informed decision-making.

The Insurance Ordinance mandates that authorized insurers maintain adequate reinsurance arrangements. This is a critical aspect of financial supervision, focusing on both the quantity and the collectability of the reinsurance. The Insurance Authority (IA) has specific guidelines, particularly for reinsurance with related companies, to mitigate potential conflicts of interest and protect policyholders. While reinsurance is crucial for financial security, the primary regulatory concern is ensuring its adequacy and the insurer’s ability to meet its obligations, which is directly addressed by the Ordinance’s requirement for such arrangements.

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 authority from the principals (building owners) to effect insurance means it possesses the same insurable interest as the principals for the purpose of the insurance contract. Therefore, if the property management company procures fire insurance for the building it manages, and the building suffers damage, the insurance would be valid because the insurable interest, derived from the building owners, is present at the time of the loss.

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.

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 greater than the insurer’s payout, the excess amount is then shared with the insured. In this scenario, the insured’s loss was $10,000, and the insurer paid $40,000. The recovery from the third party is $45,000. The insurer is entitled to the full $40,000 they paid. The remaining $5,000 ($45,000 – $40,000) is then returned to the insured, as it covers their initial $10,000 loss, and they have received $5,000 back. Therefore, the insured receives $5,000, and the insurer receives $40,000.

This question tests the understanding of ‘Non-fraudulent Non-Disclosure’ as a breach of utmost good faith. It occurs when a party, without intent to deceive, fails to reveal material facts. The scenario describes an applicant for travel insurance who, due to an oversight rather than deliberate concealment, fails to mention a pre-existing medical condition that is relevant to the policy. This omission, even if unintentional, constitutes a breach of the duty of utmost good faith, as it involves the failure to disclose a material fact. Option B describes ‘Ordinary Good Faith,’ which only requires truthful answers to direct questions, not proactive disclosure of all known facts. Option C describes a situation where the insurer is aware of the fact, negating the non-disclosure. Option D describes a situation where the fact is not material, which is contrary to the scenario.

Renewal of an insurance contract, as per the provided syllabus, legally constitutes the establishment of a new contract. This means that upon renewal, the terms and conditions of the policy are re-evaluated and agreed upon for the subsequent period, rather than simply extending the existing one. This distinction is crucial as it allows for adjustments in premiums, coverage, and other policy features based on current risk assessments and market conditions, aligning with the principle that insurance is a contract of utmost good faith and requires periodic reaffirmation.

The question tests the understanding of how insurance companies perceive and utilize the term ‘risk management’. While risk management as a broader discipline involves identifying, quantifying, and dealing with both pure and speculative risks, insurance companies often narrow their focus. They primarily apply risk management principles to the risks they underwrite or are asked to underwrite. This means their ‘risk management’ activities are geared towards reducing the potential for losses within the scope of their insurance policies, or improving the insurability of those risks. Therefore, they tend to use the term in relation to pure risks, and often further restrict it to those risks that are actually insured or are being considered for insurance.

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. Furthermore, a specific level of experience in the insurance industry is required. This experience must include at least two years in a management position, in addition to holding an acceptable insurance qualification. Alternatively, if the individual lacks an acceptable insurance qualification, a longer period of general insurance industry experience (five years, with at least two in management) is required, along with passing relevant IIQE papers. The question tests the understanding of these dual requirements: educational attainment and specific industry experience, including the management aspect.

This question tests the understanding of the responsibilities of an authorized insurer concerning its members’ financial reporting and auditor reviews, as stipulated by relevant regulations. Specifically, it focuses on the insurer’s duty to ensure that its members’ financial statements and auditor reports meet the organization’s membership rules and regulations. It also highlights the importance of the authorized insurer reviewing these reports for any adverse statements or qualifications that are not properly disclosed. The correct answer reflects the comprehensive nature of this oversight, encompassing both the receipt of compliant financial statements and the thorough review of auditor reports for any exceptions.

The Personal Data (Privacy) Ordinance (PDPO) in Hong Kong mandates that when a data user intends to use personal data for direct marketing, they must provide specific prescribed information to the data subject. This information includes the types of personal data to be used, the categories of marketing subjects, and, if applicable, the classes of persons to whom the data will be provided for direct marketing. Crucially, if the data is provided to others for gain, the data user must also inform the data subject of this fact. The information must be presented in an easily readable and understandable format. The question tests the understanding of the specific information that must be disclosed to the data subject before their data can be used or provided for direct marketing purposes, as stipulated by the PDPO.

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, making the principal liable for the loss caused by the lapse in coverage and allowing the principal to seek recourse from the agent.

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 oversight by the Insurance Authority (IA). The IA’s concern extends to both the quantity and the collectability of reinsurance. When an insurer reinsures with a related company, the IA’s Guideline on Reinsurance with Related Companies is particularly relevant. This guideline aims to ensure that the insurer’s prudent control over its reinsurance is not compromised, thereby protecting the interests of policyholders. The guideline specifies how reinsurance arrangements with related parties are assessed for adequacy and outlines the IA’s supervisory approach if these arrangements are deemed insufficient.

Participating policies, also known as with-profit policies, offer policyholders a share in the profits of the insurance company. These profits are typically distributed in the form of bonuses. The question asks about the primary mechanism for distributing these profits to policyholders. While dividends are a form of profit distribution, in the context of participating life insurance, the term ‘bonus’ is specifically used to denote the share of profits allocated to policyholders. These bonuses can be paid in various forms, such as cash, reversionary additions to the sum assured, or used to reduce premiums. Therefore, bonuses are the direct manifestation of profit sharing in participating policies.

The Insurance Agents Authority (IAA) is the primary regulatory body overseeing insurance intermediaries in Hong Kong. While the Insurance Authority (IA) is the ultimate supervisory authority for the insurance industry, the Insurance Agents Registration Board (IARB) is specifically responsible for the registration and regulation of insurance agents, responsible officers, and technical representatives under the Code of Conduct. The Hong Kong Federation of Insurers (HKFI) plays a role in the self-regulatory framework and may issue guidance, but the IARB is the direct registration authority. The Insurance Ordinance provides the overarching legal framework, but the IARB is the operational entity for agent registration.

The scenario describes a situation where an agent (the neighbour) acts to protect the principal’s (the ill person’s) property (household insurance) in an urgent situation (illness, inability to communicate) without express authority. This aligns with the definition of an agent of necessity, which arises in urgent circumstances to prevent loss or damage when communication with the principal is impossible. Such an agent is entitled to reimbursement and indemnity, and their actions bind the principal. Agency by estoppel, on the other hand, arises when a principal allows a third party to believe someone is their agent, leading the third party to rely on that representation. The duty of obedience relates to following lawful instructions, and personal performance means an agent cannot delegate without authority. Therefore, the neighbour’s actions fall under the authority of necessity.

The question tests the understanding of how salvage value impacts the indemnity provided by an insurer. 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 dispose of it, paying the full loss amount. In this scenario, the damaged vehicle still has a market value after the accident. The insurer’s liability is the cost of repairs minus the salvage value of the damaged vehicle, as the insured is expected to mitigate their loss by selling the salvage. Therefore, the insurer is only liable for the net loss after accounting for the salvage.

The question tests the understanding of the ‘Fitness and Properness’ criteria for registered persons, as outlined in Part E of the Code of Practice for the Administration of Insurance Agents. Specifically, it focuses on the implications of a group of companies for an insurance intermediary. According to the provided text, for the purposes of clause 2.2(b) of the Code of Practice, a ‘Group of Companies’ refers to a relationship where companies are subsidiaries of a holding company or are subsidiaries of each other. This definition is crucial for determining if an intermediary operating within such a structure meets the fitness and properness requirements, as the regulatory oversight and responsibilities can extend across the group. Therefore, understanding the definition of a ‘Group of Companies’ in this context is essential for compliance.

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 later recovers funds from a third party responsible for the loss, the insurer is entitled to recover only up to the amount they paid. Any recovery exceeding the insurer’s payout, but not exceeding the total loss, rightfully belongs to the insured. This ensures the insurer is made whole but does not profit from the subrogation process beyond their indemnity payment, unless specific conditions like abandonment apply.

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 there isn’t a dedicated investment department. This responsibility is paramount for ensuring the insurer’s financial stability through security, yield, and liquidity, directly impacting its ability to meet financial obligations.

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 not the subject of the question.

Participating policies, also known as with-profit policies, offer policyholders a share in the profits of the insurance company. These profits are typically distributed in the form of bonuses. The question asks about the primary mechanism for distributing these profits to policyholders. While dividends are a form of profit distribution, in the context of participating life insurance, the term ‘bonus’ is specifically used to denote the share of profits allocated to policyholders. These bonuses can be paid in various forms, such as cash, reversionary additions to the sum assured, or used to reduce premiums. Therefore, bonuses are the direct manifestation of profit sharing in participating policies.

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 can result in a payout greater than the indemnity value of the old item. 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 item with a new one of similar kind and quality, potentially leading to a payout exceeding the depreciated value of the original. The condition of average, however, is a limiting condition that prevents underinsurance by ensuring that the payout is proportionate to the sum insured. If the sum insured is less than the value of the property, the claim is reduced proportionally, thus enforcing indemnity rather than exceeding it.

The HKFI’s ‘Guidelines on Complaint Handling’ emphasize that insurers must ensure customers are aware of how and where to lodge complaints. This includes making the internal complaint handling procedures readily available. Publishing these procedures, providing access in all offices, and supplying them freely to customers upon request or automatically to complainants are key components of ensuring accessibility. Informing new customers about the existence of these procedures is also a crucial step in this accessibility framework.

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.