IIQE Paper 1 Principles and Practice of Insurance Examination Quiz 09

The question tests the understanding of the definition of a ‘composite insurer’ as per Hong Kong insurance regulations. A composite insurer is defined as an insurer that transacts both long-term and general insurance business. Option B is incorrect because it limits the scope to only one type of business. Option C is incorrect as it refers to an insurer that only handles claims, not the underwriting of different business types. Option D is incorrect because it describes an insurer that exclusively deals with reinsurance, which is a distinct category.

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 definition encompasses both the direct provision of funds for terrorism and the collection of funds for individuals known or suspected to be involved in terrorism. Option (b) accurately reflects the act of making property or financial services available to a terrorist or associate, knowing or being reckless as to their status. Option (c) focuses solely on the collection or solicitation of funds for such individuals, which is a component but not the entirety of the definition. Option (d) describes the use of insurance policies for money laundering, which is a related but distinct concept from the direct definition of terrorist financing.

The Insurance Authority (IA) has the power to intervene in an insurer’s operations to protect policyholders. One such power, as outlined in the provided text, is the limitation of premium income. This measure can be implemented if the IA believes an insurer is expanding too rapidly, potentially leading to difficulties in managing the liabilities associated with new business. The other options, while related to regulatory actions, are not the specific intervention power described in this context. Restrictions on investments and new business are separate powers, and the custody of assets by a trustee is a measure for additional security, not a direct intervention to limit growth.

This question tests the understanding of an insurer’s obligations regarding the financial health and compliance of its members, as stipulated by relevant regulations. Specifically, it focuses on the requirement for an insurer to verify that its members have submitted their financial statements and auditor’s reports as per the membership rules. The correct answer highlights the insurer’s responsibility to ensure these submissions are received and that the auditor’s reports contain no adverse statements or qualifications beyond those already noted by the insurer itself. This demonstrates a proactive approach to risk management and regulatory compliance, ensuring the overall financial integrity of the group.

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

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 personal data. Its scope is broad and encompasses both the public sector and the private sector. This means that government departments, statutory bodies, as well as companies and organizations operating in the private sphere, are all subject to the provisions of the PDPO when they handle personal data. Therefore, the Ordinance applies to both sectors.

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. Inwards reinsurance, conversely, is when an insurer accepts risks from other insurers, acting as a reinsurer itself. The scenario describes an insurer seeking to reduce its potential payout on a large policy, which directly aligns with the definition of outward reinsurance.

This question tests the understanding of an insurer’s obligations regarding the financial health and compliance of its members, as stipulated by relevant regulations. Specifically, it focuses on the requirement for an insurer to verify that its members have submitted their financial statements and auditor’s reports as per the membership rules. The correct answer highlights the insurer’s responsibility to ensure these submissions are received and that the auditor’s reports contain no adverse or qualified statements, except those explicitly noted by the insurer in its own report. This demonstrates a proactive approach to risk management and regulatory compliance within the membership structure.

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 (not a fixed benefit), 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 the given 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 between the insurers will not apply.

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 pass is a direct measure of the required qualifications.

The principle of utmost good faith in insurance mandates that both parties, particularly the proposer, must disclose all material facts that could influence a prudent insurer’s decision regarding acceptance of the risk or the premium setting. A material fact is defined as any circumstance that would influence a prudent insurer’s judgment. While a proposer must disclose such facts, there are exceptions. Facts that diminish the risk, matters of common knowledge, and facts already known or deemed known to the insurer do not need to be disclosed in the absence of specific inquiry. In this scenario, the automatic sprinkler system clearly diminishes the risk of fire and would likely influence the premium. Therefore, its non-disclosure, in the absence of an inquiry, does not breach the duty of utmost good faith.

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, must be submitted within six months of the financial year-end. This requirement is crucial for maintaining client trust and ensuring the stability of the insurance broking industry, as it allows the IA to monitor the financial soundness of authorized brokers.

This question tests the understanding of how subrogation proceeds are shared when the recovery from a negligent third party exceeds the total loss suffered by the insured. In the ‘Excess’ method of sharing subrogation proceeds, the insurer is typically reimbursed first for the amount they paid out. If the recovery is greater than the insurer’s payout, the excess amount is then shared with the insured. In this scenario, the insured’s loss was $10,000, and the insurer paid $40,000. The recovery from the third party is $45,000. The insurer is entitled to be reimbursed for their payout of $40,000. The remaining $5,000 ($45,000 – $40,000) is then returned to the insured, as it represents the portion of their loss that was not covered by the insurer’s payout. Therefore, the insured receives $5,000, and the insurer receives $40,000, totaling the $45,000 recovery.

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 item’s value could effectively exhaust the entire sum insured, leaving other contents underinsured and exposing the insurer to a concentrated risk, particularly concerning theft. The insured has the option to declare such valuable items separately to ensure they are covered up to their full declared value.

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 the specific information that must be disclosed to the data subject before their data can be used or provided for direct marketing purposes, as stipulated by the PDPO.

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. Therefore, a policy providing benefits payable upon the birth of a child falls under the statutory classification of ‘Marriage and Birth’ within the Long Term Business category.

The Insurance Authority (IA) has the power to impose further disciplinary or other actions on a Principal or Registered Person, including the respondent’s appointing Insurance Agent, if they fail to comply with a requirement to take disciplinary or other action. This is a direct consequence outlined in the regulatory framework for insurance intermediaries, emphasizing accountability within the industry. The IA’s role is to ensure compliance and maintain professional standards, and this provision allows them to address non-compliance by those responsible for overseeing or acting as registered persons.

An insurance broker has a fundamental duty to prioritize their client’s interests above all other considerations. This principle is paramount in all dealings, including advice and the arrangement of insurance contracts. Limiting a client’s choices of insurers without a valid reason would directly contravene this duty by potentially prejudicing the client’s ability to secure the most suitable coverage. While maintaining professional relationships is important, it should not come at the expense of the client’s best interests. Similarly, while compliance with regulations is mandatory, the core ethical obligation is client-centricity.

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 orally or in writing. However, if the data subject’s reply is given orally, the data user is 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 ensures a clear record of consent and compliance with the PDPO’s requirements for direct marketing.

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 outset of the policy. If the item is a total loss, the insurer pays the agreed value, which might be higher than the market value at the time of loss, again exceeding strict indemnity. Reinstatement insurances allow the insured to repair or replace the lost or damaged property to its condition immediately before the loss. This can also result in a payout exceeding the depreciated value, as the replacement will be new. The condition of average, conversely, is a condition that limits the payout to the proportion that the sum insured bears to the actual value of the property at the time of loss. If the sum insured is less than the value, the payout is reduced, preventing over-indemnity. Therefore, ‘New for Old’ cover, Agreed Value policies, and Reinstatement insurances are the provisions that can lead to more than indemnity being payable.

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 restrictions, 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 manage and reduce the risks of money laundering and terrorist financing (ML/TF) that arise precisely because of this non-compliance with the similar Hong Kong standards. This ensures that the overall AML/CFT framework remains robust despite local legal limitations.

The question tests the understanding of the definition of a ‘composite insurer’ as per Hong Kong insurance regulations. A composite insurer is defined as an insurer that transacts both long-term and general insurance business. Option B is incorrect because it limits the scope to only one type of business. Option C is incorrect as it refers to an insurer that only handles claims, not the underwriting of different business types. Option D is incorrect because it describes an insurer that exclusively deals with reinsurance, which is a different category.

The Insurance Authority (IA) has the power to impose further disciplinary or other actions on a Principal or Registered Person, including the respondent’s appointing Insurance Agent, if they fail to comply with a requirement to take disciplinary or other action. This is a direct consequence outlined in the regulatory framework for handling non-compliance within the insurance agency sector. The Insurance Business (Registration) Regulation, under which the Insurance Authority operates, empowers the IA to enforce compliance and take corrective measures against entities or individuals who fail to adhere to stipulated requirements. Therefore, the IA can indeed impose further sanctions in such instances.

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: ‘section limit’ applies to distinct parts of a policy covering different subject matters or perils, ‘reinstatement insurance’ (or ‘new for old’) means no deductions for wear and tear are made upon replacement, and ‘agreed value policies’ fix the sum insured based on expert valuation, typically for items where depreciation is minimal or subjective.

The question tests the understanding of the term ‘composite insurer’ as defined in the context of Hong Kong insurance regulations. A composite insurer is specifically defined as an insurer that transacts both long-term and general insurance business. Option B is incorrect because it limits the definition to only general business. Option C is incorrect as it focuses on the legal status of the insurer rather than the types of business conducted. Option D is incorrect because it describes an insurer that only handles long-term business, which is not the definition of a composite insurer.

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 or legal basis. The guidance note explicitly advises against copying customer information from a former employer’s records for marketing purposes with a new principal, as it’s unlikely to be within the original purpose of data collection.

The question tests the understanding of how policy wording can modify the application of proximate cause. The phrase ‘directly or indirectly’ in an exclusion clause, as illustrated by the case of the army officer killed by a train during wartime, means that the insurer is not liable even if the excluded peril (war) was only a remote or indirect cause of the loss. This broadens the exclusion beyond what ‘proximate cause’ alone might imply. Therefore, a loss where the excluded peril is a contributing factor, however minor or indirect, would be denied coverage under such wording.

The core of underwriting in general insurance involves a dynamic assessment of risks, allowing for adjustments at renewal. Unlike life insurance, where underwriting is a singular event for a policy that cannot be unilaterally altered by the insurer, general insurance policies are subject to periodic review. This means that if a risk profile changes or if the insurer’s assessment of a particular risk category evolves, the terms of coverage, including the premium or even the decision to renew, can be modified. This continuous monitoring and adjustment capability is a defining characteristic of general insurance underwriting, distinguishing it from the more static nature of life insurance underwriting once the policy is issued.

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), their recovery from a third party responsible for the loss is limited to the amount they paid. If the recovery from the third party exceeds the amount paid by the insurer, the excess belongs to the insured. Therefore, if the insurer paid HK$80,000 on a HK$100,000 loss and subsequently recovered HK$90,000 from the negligent party, the insurer is entitled to HK$80,000, and the remaining HK$10,000 belongs to the insured, as the insured has not yet been fully indemnified for their total loss.

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 relates to the requirement of providing competent advice, which is a fundamental aspect of professional conduct for registered insurance intermediaries.