IIQE Paper 1 Principles and Practice of Insurance Examination Quiz 14

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 for the share of profits allocated to policyholders. These bonuses can be paid in various forms, such as cash, reversionary additions to the sum assured, or used to reduce premiums. Therefore, bonuses are the direct manifestation of profit sharing in participating policies.

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.

The question probes the understanding of ‘fitness and properness’ for registered persons, a key aspect of regulatory compliance for insurance intermediaries in Hong Kong. Part E of the Code of Practice for the Administration of Insurance Agents outlines various requirements. Among the options provided, demonstrating a history of financial prudence and responsible management of client funds is directly linked to an individual’s suitability and integrity, which are core components of being a ‘fit and proper’ person. While other options might be desirable traits, they do not directly address the regulatory criteria for fitness and properness as defined in the relevant codes. For instance, extensive product knowledge is important for an agent’s performance, but it’s not the primary determinant of their ‘fitness and properness’ from a regulatory standpoint. Similarly, a high volume of successful claims processed, while indicative of experience, doesn’t inherently speak to the intermediary’s integrity or adherence to regulatory standards. Lastly, while client satisfaction is a positive outcome, it’s a result of good practice rather than a direct criterion for initial or ongoing fitness and properness assessment.

The scenario describes a situation where a registered person is advising a potential policyholder. According to the regulations, 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 aligns with the requirement to only offer advice within their expertise or to consult with their superiors if unsure, ensuring the client receives accurate and appropriate guidance. Options B, C, and D describe actions that are either not explicitly mandated in this context or are contrary to the principles of good conduct.

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 detailing the acts. The question asks about the primary objective of the UNATMO, which is to implement UNSC Resolution 1373 and FATF’s special recommendations on terrorist financing, specifically aimed at preventing the financing of terrorist acts. Option B is incorrect because while reporting is a defense, it’s not the primary criminalization focus. Option C is incorrect as the UNATMO’s scope extends beyond just reporting suspicious transactions to actively criminalizing the facilitation of terrorist financing. Option D is incorrect because while the Guideline provides guidance, the UNATMO itself is the primary legislation criminalizing these activities.

This question tests the understanding of product development in the context of insurance, specifically how insurers adapt to market changes. Insurers must continuously monitor and develop their existing and new products to remain competitive and relevant. This involves understanding market trends, customer needs, and competitor offerings. Option (a) accurately reflects this proactive approach to product management. Option (b) is incorrect because while innovation is important, it’s not solely about creating entirely new categories but also enhancing existing ones. Option (c) is too narrow, focusing only on regulatory compliance rather than broader market dynamics. Option (d) is incorrect as it implies a reactive stance, waiting for market shifts rather than anticipating them.

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. Specifically, 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 record-keeping. The IA must be satisfied that applicants are ‘fit and proper’ to conduct insurance broking business. While the IA also approves bodies of insurance brokers, the core of the minimum requirements for individuals and the oversight of member bodies revolve around these fundamental standards to protect policyholders and maintain market integrity.

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 forms, such as cash, reversionary additions to the sum assured, or used to reduce premiums. Therefore, bonuses are the direct manifestation of profit sharing in participating policies.

The HKFI’s ‘Guidelines on Complaint Handling’ emphasize several key principles for insurers when managing customer grievances. One of these core principles is ensuring that the complaint handling process is transparent and easily accessible to customers. This includes making the procedures readily available, providing them upon request, and informing new customers about their existence. Furthermore, communications with complainants should be clear, plain, and in the language preferred by the customer. Confidentiality of complaint information and the complainant’s identity is also paramount, with restricted access to such data. The guidelines also stress the importance of impartiality and independence in investigations, ensuring that the investigator was not involved in the original issue and that the respondent has the authority to resolve the complaint.

This question tests the understanding of product development in the context of insurance. The scenario describes an insurer actively researching and creating new insurance products to remain competitive and relevant in the market. This aligns directly with the definition of product research, which involves monitoring and developing existing and new products to keep pace with market trends and competition. Option B describes reinsurance, which is a risk transfer mechanism. Option C refers to professional indemnity insurance, a specific type of liability coverage. Option D relates to the concept of proximate cause, which determines claim validity.

The scenario describes a situation where an insurer uses the phrase ‘directly or indirectly’ in an exclusion clause. This wording is interpreted by courts to broaden the scope of the exclusion, meaning that even a remote or indirect link to an excluded peril will prevent a claim from being recoverable. In the given case, the war was an indirect cause of the officer’s death, as he was killed by a train while on duty during wartime. However, because the exclusion specifically mentioned ‘directly or indirectly caused by war,’ the insurer was able to deny the claim, as the war was a contributing factor, however remote.

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 indicates that in General Business, the top ten insurers held a 42% market share, with no single insurer exceeding 17% in any class. This suggests a more fragmented market. Conversely, for Long Term Business, the top ten insurers accounted for 75% of the market, and the top one held 16%. This higher concentration, particularly the significant share of the top insurer, points to a less evenly distributed market compared to General Business. Therefore, General Business is considered more evenly distributed among authorized insurers.

The scenario describes a Registered Person (RP) who has failed to provide requested documentation regarding their Continuing Professional Development (CPD) hours to the Insurance Authority (IA) when asked. According to the provided text, specifically the section detailing the consequences of non-compliance with CPD requirements, an RP who fails to respond to a request from the IA to produce proof of compliance should have their registration revoked for a specified period determined by the IA. Furthermore, their future registration applications will not be processed until proof of compliance is provided. Therefore, the most appropriate consequence is the revocation of registration for a period to be determined by the IA, coupled with the requirement to provide proof of compliance before any future registration is considered.

This question tests the understanding of the fundamental principles of risk management and insurance, specifically the concept of ‘insurable risk’. An insurable risk must possess certain characteristics to be accepted by an insurer. These typically include being definite and measurable, accidental, not catastrophic, and having a large exposure base. The scenario describes a situation where a company is considering insuring against the risk of a sudden and unexpected decline in the market value of its primary product due to a new competitor entering the market. This type of risk, while potentially causing financial loss, is often considered speculative rather than a pure risk, and its predictability and measurability can be challenging for insurers. The question requires the candidate to identify which of the listed factors would make this risk *less* likely to be accepted by an insurer, focusing on the inherent characteristics of insurable risks. A risk that is ‘speculative’ (offering potential for gain or loss) is generally not insurable in the same way as a ‘pure risk’ (offering only the potential for loss). Furthermore, if the decline is predictable or influenced by market forces that are difficult to quantify or control, it deviates from the criteria of a definite and measurable loss. Therefore, the presence of a predictable market shift and the speculative nature of the potential loss make it less suitable for traditional insurance coverage.

The question tests the understanding of the renewal period for an Officer/Technical Representative’s registration. According to the provided syllabus, the registration for an Officer/Technical Representative can be renewed not earlier than three months before its current expiry. This ensures that the registered person has sufficient time to complete any required Continuing Professional Development (CPD) and to meet the ‘fit and proper’ criteria before the existing registration lapses, maintaining compliance with regulatory requirements.

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. The ordinance specifically addresses situations where an individual might act as an agent for an insurer while also operating as a broker, regardless of whether they are serving the same or different clients. Therefore, an individual cannot be both an appointed insurance agent and an authorised insurance broker at the same time.

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 providing a true and fair view. These records must also be suitable for auditing. Specifically, they need to detail all dealings with insurers, clients, and the broker themselves, track all income and expenses (including brokerage, commissions, and interest), and list all assets and liabilities. The retention period for these records is a minimum of seven years. Option B is incorrect because while financial position is important, it’s one aspect of the required records, not the sole purpose. Option C is incorrect as the primary focus is on the accuracy and completeness of transactions and financial position, not solely on client communication logs. Option D is incorrect because while auditability is a requirement, it’s a consequence of having proper records, not the primary objective of the record-keeping itself.

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 scenario describes a situation where a company is sharing customer data with a third-party marketing firm for promotional purposes. According to the PDPO, the original data user must inform the data subject about the types of data being shared, the marketing categories, and importantly, that the data is being provided to another entity for direct marketing, and whether this is for gain. Option A correctly identifies the need to inform about the types of data, marketing categories, and the provision to others for direct marketing, which aligns with the PDPO’s requirements for data transfer.

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 core of underwriting in general insurance involves a continuous assessment of risks. Unlike life insurance, where underwriting is largely a one-time event at policy inception, general insurance policies are subject to renewal. This renewal process provides insurers with the opportunity to re-evaluate the risk profile of the insured and adjust terms, premiums, or even decline renewal if the risk has become unacceptable. Therefore, the ability to review and modify terms at renewal is a fundamental aspect of managing risk in general insurance underwriting.

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 2.2(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’s affiliations meet regulatory standards for fitness and properness, as regulatory bodies often scrutinize the control and influence within such corporate structures to ensure compliance and prevent conflicts of interest. Therefore, understanding the definition of a ‘Group of Companies’ in this context is directly related to assessing an intermediary’s fitness and properness.

The ‘single article limit’ in a household contents policy is a clause designed to manage the insurer’s risk when a single, highly valuable item constitutes a disproportionately large percentage of the total sum insured for all contents. If such an item is not specifically declared and insured for its individual value, the policy will cap the payout for that item to a predetermined amount, regardless of its actual market value at the time of loss. This prevents a situation where a single claim for one item could exhaust the majority of the policy’s coverage, which is a significant risk for the insurer, particularly concerning theft. The other options describe different insurance concepts: ‘reinstatement insurance’ and ‘new for old’ cover relate to how claims are settled without deductions for wear and tear, while ‘section limits’ apply to different parts or coverages within a single policy, not to individual items within a general category like ‘contents’.

The question tests the understanding of the minimum solvency margin requirements for different types of insurers in Hong Kong, as stipulated by the Insurance Companies Ordinance. For a general business insurer, the solvency margin is the higher of the amounts calculated based on premium income or claims outstanding, with a minimum of HK$10 million. However, if the insurer is carrying on statutory insurance business, this minimum is doubled to HK$20 million. Since the scenario specifies a general business insurer and does not mention statutory insurance business, the minimum requirement is HK$10 million. A captive insurer has a minimum solvency margin of HK$2 million, and a long-term business insurer also has a minimum of HK$2 million. A composite insurer has different requirements for its general and long-term business segments.

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 a separate, albeit related, responsibility. Therefore, the primary responsibility for addressing both the customer’s query about policy terms and the request for a duplicate policy falls under the Customer Servicing department’s purview.

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 core of underwriting in general insurance involves a dynamic process of risk selection and terms determination. Unlike life insurance, where underwriting is largely a one-time event for individual policies, general insurance policies are subject to renewal. This renewal mechanism allows insurers to continuously monitor the performance of individual risks and the overall portfolio. Based on this ongoing assessment, the insurer can adjust terms, premiums, or even decide not to renew coverage if the risk profile has become unfavorable. This continuous review is a key differentiator from the more static underwriting of life insurance, where changes typically require the policyholder’s consent and are not initiated by the insurer unilaterally after issuance.

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.

This question tests the understanding of the responsibilities of an authorized insurer regarding its members’ financial reporting and auditor’s reports, as stipulated by the Insurance Ordinance and related regulations. Specifically, it focuses on the insurer’s duty to ensure compliance with membership rules and to review auditor reports for any adverse statements or qualifications. Option (a) correctly identifies the dual requirements: receiving financial statements and auditor’s reports from members, and verifying that these reports contain no adverse statements or qualifications beyond those already noted by the insurer itself. Options (b), (c), and (d) are incorrect because they either omit one of the key requirements or misrepresent the scope of the insurer’s review responsibilities. For instance, (b) only mentions receiving reports but not reviewing them for adverse statements. (c) incorrectly suggests the insurer only needs to review reports with adverse statements, ignoring the requirement to receive all reports. (d) is too narrow, focusing only on the auditor’s minimum requirements without encompassing the broader review of financial statements and the absence of unlisted adverse qualifications.

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 for the share of profits allocated to policyholders. These bonuses can be paid in various ways, such as reversionary bonuses (added to the sum assured), cash bonuses, or options to reduce premiums. Therefore, bonuses are the direct manifestation of profit sharing for participating policyholders.

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. Option B is incorrect because while brokers must be licensed, the question specifically asks about approved *bodies* that represent them. Option C is incorrect as the Code of Conduct for Insurers applies to insurers, not broker associations. Option D is incorrect because while client accounts are a requirement for brokers, it’s not the primary function of an approved body.