IIQE Paper 1 Principles and Practice of Insurance Examination Quiz 20

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 is a violation of the regulatory framework.

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, questionable documentation, or verbal cues that suggest a claim might be fraudulent. 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. Therefore, the intermediary’s action should be to report suspicions to the insurer.

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, including Life and Annuity (Class A), Marriage and Birth (Class B), Linked Long Term (Class C), Permanent Health (Class D), Tontines (Class E), Capital Redemption (Class F), and three categories for Retirement Scheme Management (Classes G, H, and I). General Business is divided into seventeen classes, such as Accident, Sickness, Land Vehicles, Railway Rolling Stock, Aircraft, Ships, and Goods in Transit. The question tests the understanding of this statutory classification by presenting a scenario involving a policy that provides benefits upon the birth of a child, which falls under the ‘Marriage and Birth’ category (Class B) of Long Term Business.

This question tests the understanding of product development in the context of insurance, specifically how insurers adapt to market dynamics. Product research is the core activity that involves monitoring existing products and developing new ones to remain competitive and relevant. Option B describes underwriting, which is risk assessment, not product development. Option C refers to reinsurance, which is risk transfer, not product creation. Option D relates to claims handling, which is post-sale service.

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.

The Code of Practice for the Administration of Insurance Agents, issued by the HKFI with the approval of the Insurance Authority, defines an ‘Insurance Agent’ as a person who advises on or arranges insurance contracts as an agent or sub-agent of one or more insurers. This definition explicitly includes both individual natural persons acting as agents and entities operating as insurance agencies (sole proprietorships, partnerships, or corporations). However, it specifically excludes Responsible Officers and Technical Representatives from this primary definition of an ‘Insurance Agent’ for the purposes of the Code. Therefore, while Responsible Officers and Technical Representatives are crucial roles within the insurance agency structure and are subject to registration and conduct requirements under the Code, they are not themselves classified as ‘Insurance Agents’ in the fundamental definition provided.

This question tests the understanding of reinsurance from the perspective of an insurer ceding risk. Outward reinsurance is when an insurer transfers a portion of its own risks 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 risks from other insurers, acting as a reinsurer itself. The scenario describes an insurer seeking to reduce its potential liability on a large policy, which directly aligns with the definition of outward reinsurance.

The Insurance Ordinance strictly prohibits an individual from simultaneously holding the roles of an appointed insurance agent and an authorised insurance broker. This is to prevent conflicts of interest and ensure clear lines of responsibility. The regulation aims to maintain the integrity of the insurance market by separating the functions of agents, who represent insurers, and brokers, who represent clients. Therefore, an individual cannot act as both an agent for an insurer and a broker for a client, regardless of whether the clients are the same or different.

The Insurance Agents Registration Board (IARB) has specific procedural requirements for processing applications. According to the provided text, the IARB is not obligated to review an application if it is not submitted in the prescribed format, is incomplete, or if requested information has not been fully provided. This emphasizes the importance of adhering to the formal application process and supplying all necessary details for the IARB to consider the application. Options B, C, and D describe actions or conditions that are not the primary reason for the IARB to refuse consideration of an application under these specific procedural rules.

The scenario describes an insurance practitioner leaving their previous employer and taking customer policy information to market new products for their new company. This action violates data protection principles, specifically regarding the purpose of data use. The original data was collected for the former employer’s purposes, and using it for a new employer’s marketing constitutes a change in the purpose of use, which is generally not permitted without consent, especially when the data was obtained through employment with the original data user. This aligns with the guidance note’s emphasis on not changing the purpose of data use and not making copies of customer information from a former employer for new marketing efforts.

Participating policies, also known as with-profit policies, offer policyholders a share in the insurer’s profits. These profits are typically distributed in the form of bonuses, which can be reversionary (added to the sum assured and payable on death or maturity) or cash bonuses (paid directly to the policyholder). The consideration for these bonuses is the additional premium paid by the policyholder for the profit-sharing feature. Non-participating policies do not offer this profit-sharing mechanism and are generally cheaper as they do not include this benefit. Therefore, the primary consideration for bonuses in participating policies is the additional premium paid by the policyholder to participate in the insurer’s profits.

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 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, taking copies of customer data from a former employer to market new products is considered an unfair means of collection and a change in the purpose of use, as outlined in the guidance for direct marketing. The other options are incorrect because while data protection principles apply broadly, they do not specifically address the scenario of an employee taking data to a new employer in the way described. The Code of Practice on the Identity Card Number and other Personal Identifiers is relevant to HKIC numbers, not general customer policy information, and vicarious liability pertains to the actions of private investigators.

The principle of legality is a fundamental requirement for any contract to be legally binding. This means that the purpose and subject matter of the agreement must not be against any existing laws or public policy. If a contract’s objective is illegal, such as an agreement to commit a crime or to engage in activities prohibited by statute, it is considered void and unenforceable from its inception. Therefore, an insurance policy that facilitates or is based on an illegal act would be invalid.

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 ML/TF risks. This includes establishing internal controls and procedures. Failure to do so can lead to criminal offences and disciplinary actions by Relevant Authorities (RAs). The Drug Trafficking (Recovery of Proceeds) Ordinance (DTROP) and the Organized and Serious Crimes Ordinance (OSCO) also contain provisions related to reporting suspicious transactions and dealing with proceeds of crime, with specific penalties for non-compliance and ‘tipping off’. However, the question specifically asks about the general obligation of FIs to implement safeguards and mitigate risks, which is a core requirement under the AMLO.

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 recovery – $40,000 insurer payout) 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 HKFI’s ‘Guidelines on Complaint Handling’ emphasize that insurers must ensure their internal complaint handling procedures are accessible to customers. This includes publishing these procedures, making them available in all offices, providing them freely to customers upon request and automatically to complainants, and informing new customers about their availability. The core principle is that customers should be fully aware of how and where they can lodge a complaint.

The Insurance Ordinance in Hong Kong strictly prohibits an individual from simultaneously holding the roles of an appointed insurance agent and an authorised insurance broker. This is to prevent conflicts of interest and ensure clear lines of responsibility in the insurance market. Therefore, if Mr. Chan is an authorised insurance broker, he cannot also be an appointed insurance agent for any insurer, regardless of whether he is advising the same or different clients.

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 Insurance Companies Ordinance (Cap. 41) mandates that insurance brokers maintain records that adequately explain all transactions, accurately reflect their financial standing, and facilitate the preparation of financial statements that present a true and fair view. These records must also be suitable for auditing. The requirement to retain these records for a minimum of seven years is a key regulatory obligation to ensure accountability and facilitate investigations or audits over an extended period. Options B, C, and D describe aspects of record-keeping but do not encompass the full scope of the regulatory requirements or the specific retention period.

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’ as a breach of utmost good faith. It arises when a party, without intent to deceive (innocently or negligently), fails to reveal material facts to the other party. This is distinct from ordinary good faith, which only requires truthful answers to specific questions and does not mandate proactive disclosure of all known facts. The scenario describes a situation where an applicant omits information that, while not intentionally hidden, is crucial for the insurer to accurately assess the risk. This omission, even if unintentional, constitutes a breach of the duty of utmost good faith, leading to the policy being voidable.

In the context of insurance, insurable interest is a fundamental principle that requires the policyholder to have a legitimate financial stake in the subject matter of the insurance. This means that the policyholder must stand to suffer a financial loss if the insured event occurs. For life insurance, this interest must exist at the inception of the policy. In the scenario provided, a business partner has a clear financial stake in the continued life of their business partner, as the business’s success and profitability are directly linked to both individuals’ contributions and presence. The loss of one partner could lead to significant financial detriment for the other, such as loss of income, decreased business value, or even the dissolution of the business. Therefore, a business partner has an insurable interest in the life of their business partner. Conversely, while a landlord has an insurable interest in their property (e.g., against loss of rent due to fire), they do not typically have an insurable interest in the life of a tenant unless there’s a specific contractual arrangement or financial dependency that creates such an interest, which is not implied in a standard landlord-tenant relationship. Similarly, a tenant has an insurable interest in their rented property (e.g., for contents insurance), but not in the life of the landlord. A creditor has an insurable interest in the life of a debtor to the extent of the debt owed, as the debtor’s death could prevent repayment, but this is a specific financial relationship, not a general one.

Guidance Note 6 (GN6) clarifies that an insurance agent, Responsible Officer, or Technical Representative cannot solicit or conduct insurance business for a principal before receiving written confirmation of their registration from the Insurance Authority Registration Board (IARB). Acting as an unregistered agent is an offense under Section 77 of the Insurance Ordinance, potentially leading to prosecution. Therefore, any activity before the specified confirmation date is prohibited and can impact the individual’s fitness and properness.

The Insurance Companies Ordinance (Cap. 41) mandates that insurance brokers maintain records that adequately explain all transactions, accurately reflect their financial standing, and facilitate the preparation of financial statements that present a true and fair view. These records must also be suitable for auditing. Specifically, brokers must keep detailed records of all transactions involving insurers, clients, and themselves, as well as all income and expenses, and their assets and liabilities. These records are required to be retained for a minimum of seven years. Therefore, the primary purpose of these record-keeping requirements is to ensure transparency, accountability, and the ability to verify the financial health and operational integrity of the brokerage business.

A contract is fundamentally a legally binding agreement. While many agreements exist in daily life, not all are intended to have legal consequences. Social arrangements, like a lunch appointment, are generally not considered contracts because the parties do not intend to create legal obligations. The core of a contract lies in promises exchanged between parties, where a breach of these promises can lead to legal recourse. An insurance policy serves as evidence of an insurance contract, not the contract itself, meaning the contract’s existence is not dependent on the physical policy document.

A ‘simple contract’ is defined by its formation rather than its complexity. It is valid whether it is made verbally, in writing not under seal, or inferred from conduct. The key characteristic is the absence of strict formal requirements like sealing. While insurance contracts are typically simple contracts and often evidenced in writing for practical reasons, their validity doesn’t hinge on being a deed. A contract inferred from conduct, such as a silent purchase at a street vendor, exemplifies a simple contract where actions speak louder than words, demonstrating that formal documentation isn’t always a prerequisite for a legally binding agreement.

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 most appropriate department to initially address these customer needs is Customer Servicing.

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 encompass non-contractual oversight and auditing mechanisms that achieve the same objective of ensuring data protection. Therefore, a data user can rely on these alternative methods if a contract is not feasible, provided they effectively safeguard the personal data.

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.