IIQE Paper 1 Principles and Practice of Insurance Examination Quiz 18

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’ when a separate investment department is absent. This responsibility is paramount for ensuring the insurer’s financial stability and growth, directly impacting its ability to meet obligations and maintain operations. The other options represent important but distinct accounting duties that do not encompass the strategic management of the company’s investments.

The United Nations (Anti-Terrorism Measures) Ordinance (UNATMO) empowers the Secretary for Security to freeze assets suspected of being linked to terrorism. Section 4 of the UNATMO specifically prohibits providing property or financial services to or for the benefit of a terrorist or terrorist associate without a license. The question describes a scenario where a financial institution (FI) is asked to facilitate a transaction for an individual whose name appears on a list of individuals associated with a designated terrorist organization. This directly triggers the FI’s obligation under the UNATMO to cease dealings with such property and individuals unless a specific license is obtained. Therefore, the FI must refuse the transaction and report the suspicion to the Joint Financial Intelligence Unit (JFIU). Option B is incorrect because while reporting is necessary, refusing the transaction is the immediate action required. Option C is incorrect as the FI cannot unilaterally decide to proceed with the transaction; it requires explicit authorization. Option D is incorrect because while the FI must maintain screening systems, the immediate action in this scenario is to halt the transaction and report.

This question tests the understanding of product development within the insurance industry, specifically focusing on how insurers adapt to market dynamics. Product research is the systematic process of identifying and evaluating new insurance products or modifications to existing ones. This involves analyzing market trends, competitor offerings, and customer needs to ensure the insurer’s product portfolio remains competitive and relevant. Developing new forms of cover or enhancing existing ones, as described in the syllabus section (xv) Product Development, is directly driven by this research. Options B, C, and D describe related but distinct activities. ‘Rateable Share’ pertains to the apportionment of loss among multiple insurers, ‘Reinstatement Insurance’ is a specific type of property cover, and ‘Professional Indemnity Insurance’ is a type of liability cover, not a process for developing new products.

The question tests the understanding of the concept of ‘Agency by Estoppel’ within contract law as it applies to insurance. 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 belief, the principal is then prevented (estopped) from denying the existence of the agency relationship, even if no actual agency was granted. This is distinct from ‘Apparent Authority,’ where the principal’s manifestation of authority to the third party creates the appearance of agency, even if the agent’s actual authority is limited. In this scenario, Mr. Chan’s consistent allowance of Ms. Lee to present herself as his representative, coupled with his inaction when she made representations to clients, creates the conditions for agency by estoppel. He is estopped from denying her agency because his conduct led clients to believe she was authorized. Therefore, the clients can hold him bound by her actions.

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 party at fault bears the ultimate financial responsibility. The insurer’s right to subrogation is limited to the amount it has paid out as indemnity, meaning it cannot profit from the recovery. While subrogation can arise from various legal bases, including tort, contract, and statute, its core purpose is to transfer the insured’s recovery rights to the insurer.

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.

Under the Personal Data (Privacy) Ordinance (PDPO), when a data user intends to use personal data for direct marketing for their own purposes, and they provide the prescribed information to the data subject either orally or in writing, the data subject’s consent or indication of no objection can be given in either format. However, if the data subject’s reply is given orally, the data user is legally obligated to confirm this consent in writing to the data subject within 14 days of receiving the oral reply. This written confirmation must specify the permitted kinds of personal data and the permitted classes of marketing subjects. This requirement ensures a clear and documented record of the data subject’s consent for direct marketing activities, mitigating potential disputes and ensuring compliance with the PDPO.

The Motor Insurers’ Bureau of Hong Kong (MIB) plays a crucial role in compensating victims of road accidents when the compulsory insurance is either absent or ineffective, or when the responsible insurer is in liquidation. This is achieved through a funding mechanism that involves a surcharge on motor insurance premiums, ensuring that innocent parties are not left without recourse. The Employees’ Compensation Insurer Insolvency Bureau (ECIIB) addresses a similar issue but specifically for employees’ compensation policies, stepping in when an insurer becomes insolvent. The Insurance Claims Complaints Bureau (ICCB) handles complaints, and the Employees’ Compensation Insurance Residual Scheme Bureau (ECIRS) acts as a market of last resort for employers struggling to obtain employees’ compensation insurance.

This question tests the understanding of product development within the insurance industry, specifically focusing on 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. While other options relate to insurance operations, they do not directly address the proactive process of creating and refining insurance offerings in response to market trends and competition. Professional indemnity insurance covers liability for negligence, reinsurance is risk transfer, and the Professional Insurance Brokers Association is a regulatory body.

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 be immediate, and the aggrieved party may also seek compensation for any losses incurred due to the breach, such as lost profits. The scenario describes a situation where an exclusive agent discovers the principal has appointed another agent before the agreed-upon term, which constitutes a fundamental breach of the exclusivity clause. Therefore, the agent is entitled to end their performance and claim damages.

This question tests the understanding of reinsurance as a mechanism for insurers to manage their risk exposure. Outward reinsurance involves an insurer transferring a portion of its risk to another insurer or reinsurer. This is a fundamental concept in insurance operations, allowing companies to underwrite larger risks than they could manage on their own and to stabilize their financial results. The other options describe different aspects of the insurance industry or related concepts. Option B describes inwards reinsurance, where the insurer acts as the reinsurer. Option C refers to the total number of authorized insurers, a statistical measure. Option D relates to the premium volume, another statistical indicator.

This question tests the understanding of the role of an accountant within an insurance company, specifically focusing on the importance of managing company assets. While record-keeping, collections, and payments are all crucial 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 security of assets, achieving a reasonable return on investment, and maintaining sufficient liquidity to meet financial obligations. Therefore, the most critical aspect of the accountant’s role in this context, as emphasized in the provided text, is the prudent management of investments.

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

The Insurance Ordinance (Cap. 41) in Hong Kong categorizes insurance business into two primary divisions: General Business and Long Term Business. General business encompasses a wide array of non-life insurance products, such as property damage, motor insurance, and liability 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.

The Insurance Authority (IA) is responsible for overseeing the insurance industry in Hong Kong. When an applicant seeks registration as a Registered Person, the IA, through the Insurance Agents Registration Board (IARB), must be satisfied that the applicant is fit and proper. This involves a thorough assessment of their background and character. If, during the application process, the appointing Principal or Insurance Agent becomes aware of any new information that could negatively impact the IA’s assessment of the applicant’s fitness and properness, they have a regulatory obligation to promptly inform the IARB. This ensures that the IA has all relevant and up-to-date information to make an informed decision, thereby upholding the integrity of the industry. Failure to report such changes could lead to regulatory action.

The Insurance Ordinance in Hong Kong categorizes insurance business into Long Term Business and General Business. Long Term Business is further subdivided into various 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 of ‘Retirement scheme management’ (Classes G, H, and I). General Business is divided into 17 classes, starting with ‘Accident’ (Class 1) and including ‘Sickness’ (Class 2), ‘Land vehicles’ (Class 3), and property insurance for ‘Railway rolling stock’ (Class 4), ‘Aircraft’ (Class 5), ‘Ships’ (Class 6), and ‘Goods in transit’ (Class 7). The question asks to identify a class that falls under General Business, and ‘Ships’ is correctly identified as Class 6 within this category.

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 then 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 this scenario, Mr. Chan’s consistent allowance of Ms. Lee to present herself as his representative, coupled with his inaction when she uses his company letterhead, creates a representation to potential clients like Mr. Wong. Therefore, Mr. Wong can reasonably assume Ms. Lee has the authority to act on Mr. Chan’s behalf, and Mr. Chan would be estopped from denying this agency.

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 do so can result in disciplinary actions by Relevant Authorities (RAs), such as public reprimands, remedial orders, or pecuniary penalties. The question tests the understanding of the proactive measures FIs are legally required to take under the AMLO to manage ML/TF risks, rather than reactive reporting or specific penalties for individual employees.

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.

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 suffered by the insured was greater.

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 22(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 required fitness and properness standards, as the regulatory oversight may extend to the group’s overall structure and governance. Therefore, understanding the definition of a ‘Group of Companies’ in this context is essential for assessing an intermediary’s compliance.

This question tests the understanding of an insurance intermediary’s role in preventing corruption and fraud, specifically referencing the guidance provided by the ICAC and the Insurance Authority. The ‘Practical Guide on Professional Ethics for Life Insurance Intermediaries’ is a key resource developed in collaboration with these bodies to enhance ethical conduct and vigilance against illicit activities within the life insurance sector. Familiarity with this guide, along with the relevant Ordinance and ICAC’s best practices, is crucial for intermediaries to uphold professional standards and mitigate risks of violations.

Renewal of an insurance contract, as per the provided syllabus, legally constitutes the establishment of a new agreement. This means that upon renewal, the terms and conditions of the policy are subject to review and potential modification by the insurer, rather than simply continuing the existing contract unchanged. Therefore, an insurer can introduce new underwriting requirements or adjust premiums based on current risk assessments and market conditions.

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 defined as a situation where there is only the possibility of loss or no loss, with no chance of financial gain. Conversely, a ‘speculative risk’ involves the possibility of gain as well as loss. ‘Particular risk’ refers to a risk that affects only an individual or a small group, while ‘fundamental risk’ affects a large segment of society or the economy. Therefore, a risk that presents only the potential for loss, without any possibility of a positive financial outcome, is classified as a pure risk.

An insurance intermediary has a duty of utmost good faith towards the insurer. This duty extends to not misrepresenting or omitting information that could negatively impact an insurance application, even if doing so might seem beneficial in the short term or is done at the client’s request. Providing an inflated premium receipt, knowing it might be used to deceive an employer for financial gain, constitutes aiding and abetting fraud. The intermediary’s intention to assist or encourage the commission of the crime, even if they are indifferent to the ultimate outcome or the specific method of deception, is sufficient for liability. This aligns with the legal principle that one can be an accessory to a crime by intentionally facilitating its commission, regardless of whether they desire the crime to be completed.

The Insurance Authority (IA) mandates specific minimum requirements for individuals seeking to operate as insurance brokers or for bodies of insurance brokers seeking approval. These requirements are designed to ensure competence, financial stability, and ethical conduct within the industry. Section 6.2.3a of the provided text outlines these minimum requirements, which encompass qualifications and experience, capital and net assets, professional indemnity insurance, client account management, and proper bookkeeping. The IA’s approval process involves verifying that applicants meet these standards and are deemed ‘fit and proper’ to conduct insurance broking business. Therefore, any entity or individual acting as an insurance broker must adhere to these IA-specified standards.

This question tests the understanding of ‘Apparent Authority’ in agency law, a key concept in insurance. Apparent authority arises when a principal’s actions lead a third party to reasonably believe that an agent has the authority to act, even if that authority wasn’t explicitly granted. This is distinct from agency by estoppel, which applies when a principal allows someone to appear as an agent without any authority at all. In the scenario, the insurer’s consistent allowance of the agent to handle claims and issue policy endorsements, without explicit revocation of this perceived power, creates an appearance of authority in the eyes of the policyholder. Therefore, the insurer would be bound by the agent’s actions under the principle of apparent authority.

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 insurer’s recovery is less than their payout, they can claim the shortfall from the insured. In this scenario, the insurer paid HK$50,000 of a HK$80,000 loss. The third party’s recovery is HK$70,000. The insurer is entitled to the lesser of their payout (HK$50,000) or their proportionate share of the recovery. Their proportionate share of the HK$70,000 recovery, based on the HK$80,000 loss, would be (HK$50,000 / HK$80,000) * HK$70,000 = HK$43,750. Since HK$43,750 is less than the HK$50,000 the insurer paid, the insurer can recover HK$43,750. The insured would then receive the remaining HK$70,000 – HK$43,750 = HK$26,250 from the third party, which, when added to the insurer’s payout, still leaves the insured with an unreimbursed loss of HK$80,000 – HK$50,000 – HK$26,250 = HK$3,750. Therefore, the insurer can recover HK$43,750.

The Anti-Money Laundering and Counter-Terrorist Financing (Financial Institutions) Ordinance (AMLO) imposes specific obligations on Financial Institutions (FIs) regarding customer due diligence and record-keeping. Section 23 of Schedule 2 of the AMLO mandates that FIs must implement robust safeguards to prevent breaches of Parts 2 and 3 of Schedule 2 and to mitigate risks associated with money laundering and terrorist financing. Failure to take all reasonable measures to ensure these safeguards exist and to mitigate risks can lead to disciplinary actions by Relevant Authorities (RAs), including pecuniary penalties. The question tests the understanding of the proactive measures FIs are legally required to undertake to manage ML/TF risks, as stipulated by the AMLO, rather than reactive reporting or specific customer interaction protocols.

The scenario describes an insurance agent who is also licensed as a travel agent and wishes to engage in restricted scope travel insurance business. According to the provided text, an insurance agent engaging in restricted scope travel business must be licensed as a travel agent under the Travel Agents Ordinance. This requirement is explicitly stated in section 6.2.2(f)(x) of the Code. Therefore, the agent must possess this additional license to legally conduct this specific type of business.