IIQE Paper 1 Principles and Practice of Insurance Examination Quiz 15

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 transfer to an individual whose name appears on a list of individuals associated with a designated terrorist organization. This directly triggers the prohibition under the UNATMO. Therefore, the FI must refuse the transaction and report it to the Joint Financial Intelligence Unit (JFIU) as a suspicious transaction, as per the guidelines for combating terrorist financing. Option B is incorrect because while reporting is necessary, simply refusing the transaction without reporting is insufficient. Option C is incorrect because the FI cannot unilaterally grant a license; such authority rests with the Secretary for Security. Option D is incorrect because while the FI should maintain updated databases, the immediate action required upon identifying a potential match is to refuse and report, not just to update the database.

This question tests the understanding of subrogation, specifically how it operates when an insurer has only partially indemnified a loss due to policy limitations. Subrogation allows an insurer to step into the shoes of the insured to recover losses from a liable third party. However, the insurer’s recovery is generally limited to the amount they have paid. If the insurer has paid less than the full loss (e.g., due to a deductible or a policy limit), and the insured also has a claim against the third party, the proceeds from the third party must be shared. The insured is entitled to recover their own uninsured portion of the loss first, and then the insurer can recover what they paid. Therefore, if the insurer paid only a portion of the loss, and the insured also suffered an uninsured portion, the insured has a prior claim to any recovery from the third party up to their uninsured loss, before the insurer can recover their paid amount. This ensures the insured is made whole for their uninsured loss before the insurer recoups their payout.

The Personal Data (Privacy) Ordinance (PDPO) in Hong Kong is designed to protect the privacy of individuals by regulating the collection, holding, processing, and use of their personal data. This legislation applies broadly across both the public and private sectors, encompassing any entity that handles personal data. Therefore, neither sector is exempt from its provisions. The question tests the understanding of the scope of application of the PDPO, which is a fundamental aspect of data privacy regulations in Hong Kong.

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 it has paid out as indemnity. Therefore, if the insurer pays HK$50,000 for a loss caused by a third party, it 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 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, the statement that Long Term Business exhibits greater market concentration among its top players than General Business is accurate based on the provided statistics.

This question tests the understanding of an insurance intermediary’s role in preventing corruption and fraud, specifically referencing the ICAC’s initiatives and the ‘Practical Guide on Professional Ethics for Life Insurance Intermediaries’. The ICAC provides free, confidential services, including best practice packages and advice, to help organizations prevent corruption. For the insurance industry, they offer training and have collaborated on a guide to enhance ethical conduct and reduce regulatory violations. Therefore, familiarizing oneself with the ICAC’s resources and the ethical guide is a proactive step for intermediaries to uphold professional standards and prevent misconduct.

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 maintain clear lines of responsibility within the insurance industry. Therefore, if Mr. Chan is an appointed insurance agent for “SecureLife Insurance”, he cannot simultaneously be an authorised insurance broker for “Global Risk Solutions”, regardless of whether the clients are the same or different.

This 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 conduct, 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 grants the agent more authority than they actually possess, but the agency itself exists. In the scenario, Mr. Chan’s consistent actions of allowing Ms. Lee to present herself as his representative, coupled with his failure to correct this misrepresentation, creates the conditions for agency by estoppel. Therefore, he would be bound by her actions towards a third party who reasonably relied on this representation.

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, which is not the insured’s responsibility in this context.

This question tests the understanding of apparent authority in agency law, specifically how a principal’s past conduct can create an impression of authority in the agent towards a third party, even if the agent’s actual instructions were to the contrary. The scenario describes an insurance agent who, despite being prohibited from accepting certain risks, has repeatedly done so with the principal’s subsequent issuance of policies. This consistent past behaviour, known to the client, leads the client to reasonably believe the agent has the authority to bind the principal for such risks. This is the essence of apparent authority, which protects third parties who rely on such representations. Option B is incorrect because actual authority refers to the authority expressly or impliedly given by the principal to the agent, which is not the case here. Option C is incorrect as ratification occurs when a principal retrospectively approves an unauthorised act, which is not described as the primary mechanism binding the principal in this ongoing scenario. Option D is incorrect because ostensible authority is a synonym for apparent authority, but the explanation focuses on the specific mechanism of how it arises through the principal’s conduct, making the concept of apparent authority the more direct answer to the question about the basis of the principal’s liability.

The question tests the understanding of the role of approved bodies of insurance brokers under 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 insurance broking industry. Option B is incorrect because while the Insurance Authority oversees the industry, it does not directly administer the client accounts of brokers. Option C is incorrect as the Code of Conduct for Insurers applies to insurers, not brokers, and its focus is on claims handling. Option D is incorrect because the assignment of the right to insurance money is a contractual matter between parties, not a function of approved broker bodies.

The core of underwriting in general insurance, unlike life insurance, is its dynamic nature. Because general insurance policies are typically subject to renewal and can be cancelled by the insurer, underwriting is not a singular, fixed event. Insurers can continuously monitor risks and adjust terms or decide on renewal based on performance and changing circumstances. This allows for a less centralized approach to underwriting compared to life insurance, where the commitment is long-term and changes require policyholder consent. Therefore, the ability to review and adjust terms at renewal is a key characteristic of general insurance underwriting.

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 business models differ significantly between these two categories. Therefore, ‘Long Term Business’ is the correct counterpart to ‘General Business’ as defined by the Ordinance.

This question tests the understanding of reinsurance from the perspective of an insurer. Outward reinsurance is when an insurer transfers some of its risk 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 risk from other insurers, acting as a reinsurer itself. Therefore, an insurer seeking to reduce its own risk burden would engage in outward reinsurance.

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 are distinct functions. Complaints handling is another responsibility, but it’s not the primary focus of the customer’s request in this scenario. Therefore, the Customer Servicing department is the most appropriate area to address these needs.

This question tests the understanding of product development in the context of insurance, specifically how insurers adapt to market trends and competition. Product research is the systematic process of identifying and evaluating new insurance products or modifications to existing ones. This involves analyzing market needs, competitor offerings, and emerging risks to ensure the insurer’s portfolio remains relevant and competitive. Developing new forms of cover, whether as standalone products or as a package, is a direct outcome of effective product research and development, aligning with the goal of keeping pace with market dynamics and customer demands.

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 these notification requirements under the PDPO for direct marketing purposes.

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 Authority (IA) mandates that insurance brokers must submit annual audited financial statements to demonstrate their financial health and compliance with regulatory requirements. These statements, along with an auditor’s report confirming adherence to minimum financial standards, are crucial for maintaining the broker’s authorization. The submission deadline is within six months after the close of the financial year. This requirement is stipulated under Section 73(1) of the Insurance Ordinance and is a key component of the ‘fit and proper’ assessment, ensuring the broker operates soundly and protects client interests.

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 inherently depend on a formal deed. Therefore, an agreement for insurance that is made through spoken words and actions, without a formal written document under seal, is still considered a valid simple contract.

The Insurance Authority (IA) and the Industry and Regulatory Bodies (IARB) assess whether an individual is ‘fit and proper’ to be registered as an insurance intermediary. A key aspect of this assessment involves reviewing their past conduct. Specifically, the regulatory framework requires an examination of whether the individual has previously been found to be in breach of the Code of Conduct or the rules of the Hong Kong Federation of Insurers (HKFI). This ensures that individuals with a history of non-compliance are identified and appropriately managed, maintaining the integrity of the insurance industry. Options B, C, and D describe situations that are not directly stipulated as criteria for determining a ‘fit and proper’ status in the provided text, although they might indirectly influence such a decision.

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 ways, such as cash payments, reducing future premiums, or increasing the sum assured. Therefore, bonuses are the direct manifestation of profit sharing in participating policies.

This question tests the understanding of vicarious liability in the context of data protection under Hong Kong law. The Personal Data (Privacy) Ordinance (PDPO) holds data users responsible for the actions of their data processors. Therefore, if a data processor infringes on a data subject’s privacy, the data subject can seek recourse from the data user, who is considered liable as the principal for the data processor’s wrongful acts. The contract between the data user and data processor can serve as evidence of compliance, but it does not absolve the data user of their primary responsibility to the data subject. The data processor itself is not directly liable to the data subject for infringing their privacy.

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 potential conflicts of interest and ensure clear lines of responsibility in the insurance market. Therefore, if an individual is an appointed insurance agent for Insurer X, they cannot also be an authorised insurance broker, even if they are dealing with different clients or different types of insurance.

The Personal Data (Privacy) Ordinance (PDPO) mandates that data users must take specific actions before using personal data for direct marketing. This includes informing the data subject about the intended use and providing a mechanism for them to object. While a contract is a common method for data users to impose obligations on data processors, the PDPO also allows for ‘other means’ of compliance. These ‘other means’ are not explicitly defined but generally refer to non-contractual oversight and auditing mechanisms. Therefore, a data user can utilize these non-contractual methods to ensure a data processor adheres to data protection requirements, even if a formal contract is not in place for that specific aspect.

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 indemnity, cover the same interest affected, cover the same peril causing the loss, cover the same subject matter, 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.

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 can occur even if the property is not ultimately used for such purposes. Option (b) describes making property or services available to a known or suspected terrorist or associate, which is also a form of terrorist financing. Option (c) focuses on the collection or solicitation of funds for such individuals. However, the core definition of terrorist financing encompasses the intent and use of property for terrorist acts, making option (a) the most comprehensive and direct definition.

Guidance Note 6 (GN6) explicitly states that no individual, whether a prospective or current insurance agent, Responsible Officer, or Technical Representative, is permitted to act or present themselves as such for any principal before receiving written confirmation of their registration from the Insurance Authority (IA) via a Notice of Confirmation of Registration. Acting in this capacity before the specified effective date constitutes a potential offense under Section 77 of the Insurance Ordinance, leading to possible criminal prosecution. Therefore, any activity undertaken before this official confirmation is invalid and carries legal repercussions.

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 from this non-compliance. This ensures that even if local laws prevent full adherence to Hong Kong standards, the overall risk exposure is managed. Simply continuing operations without informing the regulator or taking compensatory measures would be a breach of the guidelines.

This question tests the understanding of apparent authority in agency law, a key concept within the IIQE syllabus. Apparent authority arises when a principal’s conduct leads a third party to reasonably believe that an agent has authority, even if that authority hasn’t been expressly granted. In the scenario, the principal’s consistent past actions of issuing policies for cargo risks to West Africa, despite an internal prohibition to the agent, created a reasonable belief in the client that the agent possessed the authority to bind the principal for such risks. Therefore, the principal is bound by the agent’s actions due to apparent authority, not because the agent had actual authority or because the principal ratified the act after the fact. The concept of vicarious liability is a consequence of the principal being bound, but apparent authority is the mechanism by which the principal becomes bound in this specific situation.