IIQE Paper 1 Principles and Practice of Insurance Examination Quiz 17

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 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 but can be invalidated by the affected party. 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 binding on all parties and cannot be voided.

This question tests the understanding of how proximate cause applies when multiple perils are involved in a loss, specifically focusing on the relationship between insured and uninsured perils in a chain of events. According to the principles of proximate cause, if an uninsured peril leads to an insured peril, and that insured peril then causes the loss, the loss is generally recoverable. In this scenario, the master’s negligence (an uninsured peril) directly caused the collision, which in turn caused the fire (an insured peril). The fire then led to the explosion and subsequent leaks, resulting in water damage. The key is that the fire, an insured peril, was a direct and natural consequence of the initial uninsured peril and was the immediate cause of the subsequent events leading to the loss. Therefore, the loss caused by water damage, stemming from the fire, is recoverable under the policy that covers fire.

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 supervisory review by the IA regarding both the quantity and the collectability of the reinsurance. The Guideline on Reinsurance with Related Companies specifically addresses situations where an insurer reinsures with a related entity, aiming to ensure that the insurer’s prudent control over its reinsurance is not compromised, thereby protecting the insuring public. Therefore, the IA’s assessment of reinsurance adequacy is a key aspect of its financial supervision.

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. This section details the requirements and limitations for individuals seeking to be registered as insurance agents. Specifically, it addresses situations where an individual might be deemed unfit or improper to act as an agent. Option A correctly identifies that a registered person must maintain the required standards of competence and integrity throughout their registration period, which is a core aspect of ongoing fitness and properness. Option B is incorrect because while a group of companies can be relevant to an agent’s business structure, it’s not the primary determinant of an individual’s fitness. Option C is incorrect as the ‘franchise’ is a policy provision related to loss coverage, not an individual’s suitability. Option D is incorrect because while fraud is a serious issue, the question is about the general criteria for fitness, not solely about past fraudulent activities, and the definition of ‘fraudulent misrepresentation’ is a specific type of breach of good faith.

The scenario describes a situation where a policy exclusion for losses ‘directly or indirectly’ caused by war is invoked. In insurance law, the phrase ‘directly or indirectly’ is interpreted broadly by courts. It means that if the excluded peril (in this case, war) is a contributing factor to the loss, regardless of how remote or indirect that contribution might be, the exclusion will apply. The death of the officer by a train, while not a direct act of war, occurred during wartime while he was on duty supervising a railway station. The court’s interpretation in such cases is that the war, even as an indirect cause, brings the loss within the scope of the exclusion. Therefore, the insurer is not liable because the policy wording extends the exclusion to indirect causation.

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 that are enforceable by law. An insurance policy serves as evidence of an insurance contract, not the contract itself. If the policy document is destroyed, the underlying contractual obligation remains valid.

Guidance Note 6 (GN6) clarifies that an insurance agent, Responsible Officer, or Technical Representative cannot solicit or conduct insurance business on behalf of a principal until the Insurance Authority Registration Board (IARB) formally confirms their registration in writing via a Notice of Confirmation of Registration. Acting or holding oneself out as an agent before this confirmation is an offense under Section 77 of the Insurance Ordinance, potentially leading to prosecution. Therefore, any activity before the specified confirmation date is prohibited.

The Insurance Ordinance (Cap. 41) mandates specific minimum paid-up capital requirements for insurers operating in Hong Kong. For an insurer conducting only general business or only long-term business, but not any statutory (compulsory) insurance business, the minimum paid-up capital is HK$10 million. If the insurer engages in any statutory (compulsory) insurance business, regardless of whether it also conducts other types of insurance business, the minimum paid-up capital requirement increases to HK$20 million. Therefore, an insurer solely focused on long-term business, without engaging in compulsory insurance, needs HK$10 million.

This question tests the understanding of how salvage value impacts the indemnity provided by an insurer. When damaged property has 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 sell it, effectively recovering some of their payout. In this scenario, the insurer chose the latter, meaning they paid the full agreed-upon loss amount and then took ownership of the damaged vehicle to recoup costs through its sale. This is a standard practice to ensure the principle of indemnity is upheld, preventing the insured from profiting from a loss.

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 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 and asking to identify the correct classification based on the provided descriptions.

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, as they hold distinct roles within the agency structure.

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, and the top one held 16%. This indicates a significantly higher concentration of market share among fewer players in Long Term Business compared to General Business, where the market is more evenly distributed among authorized insurers. Therefore, General Business is considered more evenly distributed.

The Insurance Complaints Committee (ICCB) Panel’s powers are guided by its Articles of Association. These stipulate that the Panel must consider the policy terms, general principles of good insurance practice, applicable law, and guidelines from bodies like the Hong Kong Federation of Insurers (HKFI) or the Bureau. Crucially, while policy terms generally prevail, the Panel can override them if they lead to an unfair or unreasonable outcome for the complainant. This implies a degree of discretion to look beyond the literal wording of a contract to ensure fairness, a core tenet of good insurance practice, particularly in claims handling as outlined in the Code of Conduct for Insurers.

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 addresses the conduct and registration of agents.

The scenario describes a Registered Person (RP) who has failed to submit proof of their Continuing Professional Development (CPD) hours when requested by the Insurance Authority (IA). According to the provided information, if an RP fails to respond to a request from the IA to produce proof of compliance with CPD requirements, their registration should be revoked for a period determined by the IA. Furthermore, their future applications for registration will not be processed unless they can provide the required proof of compliance. Therefore, the IA would likely revoke the RP’s registration for a specified duration and require proof of compliance before considering any future registration.

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. Therefore, if Mr. Chan is an authorised insurance broker, he cannot also be an appointed insurance agent for any insurer, regardless of whether he provides advice to the same or different clients.

This question tests the understanding of non-fraudulent non-disclosure, which is a breach of the duty of utmost good faith. This occurs when a party, without intent to deceive, fails to reveal material facts to another party. In the context of insurance, the insured has a duty to disclose all material facts to the insurer. Failing to do so, even if unintentionally or due to negligence, can invalidate the policy. Option B describes a situation where the insured actively conceals information, which is fraudulent non-disclosure. Option C describes a situation where the insured only answers questions truthfully, which aligns with ordinary good faith but not the broader duty of disclosure. Option D describes a situation where the insurer fails to disclose information, which is not the insured’s responsibility in this context.

The principle of utmost good faith in insurance mandates that all material facts 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 inquiry is made. An automatic sprinkler system, by reducing the likelihood of fire damage, inherently diminishes the risk. Therefore, its non-disclosure, in the absence of a specific question about protective measures, does not constitute a breach of utmost good faith because it would have led to a lower premium, not a rejection of the risk or an increase in premium.

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, and the top one held 16%. This indicates a significantly higher concentration of market share among fewer players in Long Term Business compared to General Business, where the market is more evenly distributed among authorized insurers. Therefore, General Business is considered more evenly distributed.

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. Inward reinsurance, conversely, is when an insurer accepts risks from other insurers, acting as a reinsurer itself. Therefore, an insurer seeking to reduce its direct exposure to a large policy would engage in outward reinsurance.

The Insurance Ordinance explicitly prohibits an individual from simultaneously holding the roles of an appointed insurance agent and an authorised insurance broker. This is to prevent potential conflicts of interest and ensure clear lines of responsibility within the insurance industry. While an individual might be involved in other capacities, such as a director, the key restriction is on acting as both an agent and a broker, especially when providing advice to clients. Therefore, an individual who is an appointed insurance agent cannot also be an authorised insurance broker.

An insurance broker has a fundamental duty to act in the best interests of their clients. This principle is paramount and dictates that a broker should not unduly restrict a client’s options by favouring a limited number of insurers. By recommending only a few insurers, the broker might be compromising the client’s ability to secure the most suitable coverage or terms, potentially due to the broker’s own convenience or existing relationships, rather than the client’s specific needs. This action directly contravenes the requirement to place client interests above all other considerations and to avoid unreasonably limiting choices.

When a Hong Kong-incorporated financial institution (FI) operates overseas and its foreign branch or subsidiary cannot comply with Hong Kong’s Customer Due Diligence (CDD) and record-keeping requirements due to local legal prohibitions, the FI has specific obligations. It must first inform its relevant regulator in Hong Kong about this inability to comply. Secondly, and crucially, the FI must implement additional measures to effectively mitigate the Anti-Money Laundering and Counter-Terrorist Financing (AML/CFT) risks that arise specifically because of this non-compliance with the similar Hong Kong standards. This ensures that the overall risk exposure is managed even when direct adherence to Hong Kong’s rules is not feasible.

Guidance Note 6 (GN6) clarifies that an insurance agent, Responsible Officer, or Technical Representative must not act or present themselves as engaging in insurance business for a Principal before receiving written confirmation of their registration from the Insurance Authority Accreditation and Registration Board (IARB). Acting as an unregistered agent before the specified confirmation date is an offense under Section 77 of the Insurance Ordinance, potentially leading to criminal prosecution. For Responsible Officers and Technical Representatives, acting before registration constitutes a breach of the Code and can impact their fitness and properness. Therefore, any activity or representation as an agent, RO, or TR must only commence on or after the date indicated on the IARB’s Notice of Confirmation of Registration.

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 that its validity does not depend on specific formalities like being sealed. While many insurance contracts are evidenced in writing for practical reasons, their legal validity as simple contracts doesn’t strictly require it, unlike contracts by deed which have specific formal requirements.

The Insurance Claims Complaints Bureau (ICCB) is a self-regulatory body established by the insurance industry in Hong Kong. Its primary function is to handle complaints from individual policyholders concerning claims arising from personal insurance contracts with its member insurers. The ICCB’s Insurance Claims Complaints Panel, which handles these complaints, has the authority to make awards against insurers. The maximum award amount the Panel can make is HK$800,000. Insurers cannot appeal an award made by the Panel. However, a complainant who is dissatisfied with the Panel’s award retains the right to pursue legal action for further redress. Therefore, the statement that the Panel can make an award against an insurer up to HK$800,000, and the insurer has no right of appeal, accurately reflects the ICCB’s powers and limitations.

When a Hong Kong-incorporated Financial Institution (FI) operates overseas and its foreign branch or subsidiary cannot adhere to Customer Due Diligence (CDD) and record-keeping requirements that are similar to Hong Kong’s Schedule 2, Parts 2 and 3, due to local legal prohibitions, the FI has specific obligations. Firstly, it must formally notify its relevant regulatory authority (RA) in Hong Kong about this inability to comply. Secondly, and crucially, the FI must implement additional measures to effectively manage and reduce the Anti-Money Laundering and Counter-Terrorist Financing (AML/CFT) risks that arise specifically because of this non-compliance with the similar Hong Kong standards. This ensures that even with local legal constraints, the FI actively mitigates potential vulnerabilities.

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 common knowledge and facts already known to the insurer are exceptions, a fact that reduces the risk, such as the presence of a sprinkler system, is still considered relevant to the insurer’s assessment of the risk and premium calculation, even if it lowers the risk. Therefore, its non-disclosure, even if it would have led to a lower premium, is a breach of utmost good faith because it impacts the insurer’s judgment.