IIQE Paper 1 Principles and Practice of Insurance Examination Quiz 16

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 representation, the principal is prevented (estopped) from denying the existence of the agency relationship. In this scenario, Mr. Chan’s consistent allowance of Ms. Lee to present herself as his representative, coupled with his failure to correct this impression, creates an appearance of authority. When Ms. Lee, acting on this apparent authority, secures a policy for Mr. Wong, Mr. Chan cannot later disclaim responsibility for Ms. Lee’s actions towards Mr. Wong, as Mr. Wong reasonably relied on the representation of agency. This aligns with the definition of Agency by Estoppel, where the principal is bound by the agent’s actions due to the principal’s own conduct.

The Personal Data (Privacy) Ordinance (PDPO) in Hong Kong is a comprehensive piece of legislation designed to protect the privacy of individuals by regulating the collection, holding, processing, and use of their personal data. It applies broadly to all entities, whether they are governmental bodies or private companies, that engage in such activities. The Ordinance aims to ensure that personal data is handled responsibly and ethically, regardless of the sector. Therefore, it encompasses both the public and private sectors.

An insurance broker is legally considered an expert in insurance and has a primary duty to their client, the policyholder. This means their advice must be impartial, and the client’s interests are paramount. If a broker fails to exercise the expected level of care and expertise, leading to a loss for the client, they can be held liable for professional negligence. This liability necessitates that brokers maintain professional indemnity insurance to cover potential claims arising from such failures. In contrast, an insurance agent’s primary responsibility is typically to the insurer, and while they have obligations to policyholders, their duty of care is generally considered less onerous unless they explicitly profess specialized skills beyond basic insurance provision. Consequently, insurance agents are not statutorily mandated to carry professional indemnity insurance in the same way brokers are.

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 the outset. This principle ensures that the legal system does not lend its authority to agreements that undermine societal order or statutory provisions. Therefore, a contract to sell counterfeit goods, which is an illegal activity, would be void due to illegality.

The question tests the understanding of the role of approved bodies of insurance brokers as defined by Hong Kong regulations. Section 70 of the Insurance Ordinance empowers the Insurance Authority to approve associations of insurance brokers. These approved bodies, such as the Hong Kong Confederation of Insurance Brokers and the Professional Insurance Brokers Association Limited, play a crucial role in self-regulation and upholding professional standards within the brokerage sector. The other options describe different aspects of insurance operations or regulatory bodies not directly related to the definition of approved bodies of insurance brokers.

Guidance Note 6 (GN6) explicitly states that no individual, whether a prospective or current insurance agent, Responsible Officer, or Technical Representative, is permitted to represent themselves as engaging in insurance agency business for a Principal before receiving written confirmation of their registration from the Insurance Authority’s Registration Board (IARB). Acting or holding oneself out as an insurance agent before this official confirmation, as stipulated in Section 77 of the Insurance Ordinance, constitutes an offense. Therefore, the effective date of registration is the date specified by the IARB in the Notice of Confirmation of Registration, and any activity before this date is non-compliant.

The question tests the understanding of the ‘Fitness and Propriety’ requirements for registered persons under Hong Kong insurance regulations, specifically referencing Part E of the Code of Practice for the Administration of Insurance Agents. This section outlines the criteria that individuals must meet to be considered suitable to act as insurance agents. While other options relate to insurance concepts, they do not directly address the suitability criteria for registered persons as mandated by the Code of Practice.

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, as outlined in the guidance. The other options are incorrect because while lawful and fair means are important, the core issue here is the misuse of data for a different purpose. Collecting HKIC numbers or engaging private investigators are separate topics with their own regulations, and while data security is crucial, it’s not the primary violation in this specific scenario.

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, operating an insurance business without this prior authorization from the IA is a violation of the regulatory framework.

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 faces potential financial harm due to a natural disaster, which is a classic example of a pure risk as there is no potential for financial gain from the event itself, only the possibility of loss.

The scenario describes a situation where a registered person is advising a potential policyholder. According to the regulations for the conduct of registered persons, specifically concerning general insurance business, a registered person must ensure they are competent to provide advice or seek assistance from their Principal or appointing Insurance Agent when necessary. This directly addresses the need for the registered person to possess the requisite knowledge and skills before offering recommendations, or to obtain support if they lack it, to ensure the advice given is appropriate and well-informed.

The question tests the understanding of the primary function of insurance as a risk transfer mechanism. While insurance does contribute to employment, financial services, and economic development, its core purpose is to shift the potential financial burden of a loss from an individual or entity to the insurer in exchange for a premium. The other options represent ancillary benefits or broader economic impacts, not the fundamental role of insurance.

The scenario describes an individual acting as an insurance agent who also sells MPF schemes. According to the provided text, specifically section 6/25 (ix), an insurance agent who also engages in selling or advising on MPF schemes or their constituent or underlying funds must be registered as an MPF intermediary with the MPFA. This is a mandatory requirement to ensure compliance with regulations governing both insurance and MPF products. The other options are incorrect because they either do not address the MPF intermediary registration requirement or suggest actions that are not explicitly mandated for this specific dual role.

The scenario describes a situation where a customer is seeking clarification on policy terms and requesting a duplicate document. According to the provided 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 focus on broader company image and external communications, not direct customer requests for policy-related information or documents. Complaints handling is a separate function, though it may involve liaison with other departments. Therefore, the primary responsibility for addressing this customer’s needs falls under the Customer Servicing department’s remit for correspondence and documentation.

The scenario describes an insurance practitioner who, upon changing employers, copies customer policy information from their previous firm. This action violates data protection principles, specifically regarding the lawful and fair means of data collection and the purpose limitation for data usage. The copied data was collected by the former employer for specific purposes related to their business. Using this data for marketing the new employer’s products constitutes a change in the purpose of use, which is generally not permitted unless explicit consent is obtained or the new purpose is compatible with the original one. The guidance note emphasizes that such actions are unlikely to be within the original purpose for which the data was collected, highlighting the importance of respecting data privacy and usage limitations.

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 Insurance Authority (IA) mandates that individuals seeking to be registered as insurance intermediaries must demonstrate a commitment to ongoing professional development. Clause 6/32 (d)(iii) of the Code of Conduct for Persons Licensed by the IA explicitly states that all Registered Persons must adhere to the Continuing Professional Development (CPD) Programme requirements as stipulated by the IA. Failure to meet these CPD obligations would render a person not fit and proper to continue their registration, as it signifies non-compliance with regulatory mandates. Therefore, a person who has not fulfilled their CPD requirements would be considered to have failed to comply with the prescribed rules and policies.

The Insurance Authority (IA) mandates that insurance brokers must submit annual audited financial statements and an auditor’s report within six months of their financial year-end. This auditor’s report specifically confirms adherence to minimum regulatory requirements, including those related to financial soundness and operational capabilities. While a broker must disclose their registration number upon request and on business cards, and provide a Customer Protection Declaration for new long-term policies, these are separate obligations from the annual financial reporting and auditor’s confirmation of compliance with minimum requirements.

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 commencement of the policy. If the item is lost or destroyed, the insurer pays the agreed value, which might be higher than the market value at the time of the loss, again exceeding strict indemnity. Reinstatement insurance allows the insured to repair or replace the lost or damaged property to a condition substantially the same as it was before the loss, without deduction for depreciation. This can also lead to a payout exceeding the depreciated value. The condition of average, conversely, is a clause designed to prevent underinsurance by ensuring that the payout is proportionate to the sum insured relative to the actual value of the property. If the property is insured for less than its full value, the payout for a partial loss will be reduced proportionally, thus enforcing indemnity rather than exceeding it.

The Insurance Agents Registration Board (IARB) plays a crucial role in the regulation of insurance intermediaries in Hong Kong. According to the provided text, the IARB has the authority to investigate matters related to registration applications, renewals, and complaints against registered persons. It can also refer these matters for investigation and receive reports. Furthermore, the IARB can direct principals or registered persons to take disciplinary action and has the power to register or revoke the registration of insurance agents, responsible officers, and technical representatives. Finally, it is mandated to report breaches of the Insurance Ordinance or the Code to the Insurance Authority (IA) if a registered person is found to be unfit or has contravened regulations. Therefore, all these functions fall within the purview of the IARB’s responsibilities.

A Technical Representative (TR) of an insurance broker must meet several criteria to be authorized. One of these is passing the relevant papers of the Insurance Intermediaries Qualifying Examination (IIQE), similar to an insurance broker, unless they possess an acceptable recognized insurance qualification or are granted an exemption based on specific criteria outlined in the Minimum Requirements. This ensures a baseline level of competency and knowledge in insurance broking practices.

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.

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 means the Panel is not strictly bound by the literal interpretation of policy wording if it conflicts with fairness and good practice. Therefore, the Panel’s authority extends to looking beyond the strict wording of a policy to ensure a just resolution, especially concerning claims handling as outlined in the Code of Conduct for Insurers.

The core principle here is that Financial Institutions (FIs) must establish robust internal controls to prevent employees from inadvertently or intentionally revealing information that could alert a customer or another party that their activities are under scrutiny for potential money laundering or terrorist financing (ML/TF). This includes training staff to conduct customer inquiries in a manner that avoids any suggestion of tipping off. The Guideline emphasizes that knowing customer behavior and identifying deviations is key to recognizing suspicious activities. Therefore, ensuring staff are adequately trained on recognizing ML/TF indicators and understanding the risks associated with customer interactions is paramount to preventing tipping off.

The core principle here is that financial institutions (FIs) must establish robust internal controls to prevent their employees, including appointed insurance agents, from inadvertently or intentionally revealing information that could tip off a customer or another party about an ongoing anti-money laundering (AML) or counter-terrorist financing (CFT) investigation. This involves training staff to recognize suspicious activities by understanding normal customer behavior and transaction patterns. When a suspicion arises, the FI must manage the Customer Due Diligence (CDD) process carefully to avoid any actions that could be construed as tipping off. The guideline emphasizes that individual insurance agents, while often not maintaining records themselves, are still responsible for ensuring the insurer they represent has compliant record-keeping systems and that these records are readily accessible to regulatory authorities. Therefore, the agent must verify the insurer’s compliance with AMLO record-keeping requirements and the accessibility of those records.

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. Non-response to requests for proof of compliance will also lead to revocation for a period determined by the IA, with future registration contingent on providing proof of compliance.

Under the Personal Data (Privacy) Ordinance (PDPO), when a data user intends to use personal data for direct marketing for the first time, they must inform the data subject of their opt-out right. This notification is a crucial step to ensure data subjects are aware of their rights and can control how their data is used for marketing purposes. Failure to provide this notification constitutes an offence. The scenario describes a situation where a data user is about to use personal data for direct marketing without explicitly informing the data subject about their right to opt-out, which is a contravention of the PDPO’s requirements.

The question tests the understanding of the minimum net asset requirements for different types of insurance brokers in Hong Kong, as stipulated by relevant regulations. An unincorporated insurance broker is required to maintain a minimum net asset value of HK$100,000 at all times. An incorporated insurance broker has a dual requirement: a minimum net asset value of HK$100,000 and a minimum paid-up share capital of HK$100,000. The question specifically asks about an incorporated insurance broker, making the HK$100,000 paid-up capital requirement relevant. The other options represent incorrect or irrelevant figures or requirements.

Contribution between insurers applies when multiple policies cover the same loss. For contribution to be applicable, several conditions must be met. These include that each policy must provide an indemnity, cover the same interest affected, cover the same peril causing the loss, cover the same subject matter of insurance, and each policy must be liable for the loss (i.e., not subject to an exclusion that prevents contribution). In this scenario, while both policies cover the same peril (fire) and the same subject matter (stock-in-trade), they cover different interests: the merchant’s interest as owner and the warehouse operator’s interest as bailee. Therefore, criterion (b) – covering the same interest – is not met, and contribution will not apply between the insurers.

The Insurance Ordinance (Cap. 41) mandates that any entity wishing to conduct insurance business in or from Hong Kong must first secure authorization from the Insurance Authority (IA). This authorization process involves meeting specific minimum requirements set forth by the Ordinance, which include aspects like paid-up capital, solvency margins, 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, operating an insurance business without this prior authorization is a contravention of the regulatory framework.