IIQE Paper 1 Principles and Practice of Insurance Examination Quiz 08

This question tests the understanding of an agent’s duty of care and skill. An agent is expected to exercise reasonable care and skill in performing their duties. While the law doesn’t demand perfection, a failure to meet this standard can lead to the principal reclaiming losses from the agent. In this scenario, the agent’s failure to renew the policy due to oversight, despite having the funds, demonstrates a lack of reasonable care and skill, making the principal liable for the loss caused by the lapse in coverage and allowing the principal to seek recourse from the agent.

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 customers or other individuals about suspicious activity investigations. This involves training staff to recognize unusual patterns, understand their reporting obligations, and conduct customer due diligence (CDD) in a manner that avoids disclosure. The guideline emphasizes that FIs are responsible for ensuring their staff are adequately trained and aware of these risks, particularly when dealing with potentially suspicious transactions. Therefore, an FI must proactively implement systems and training to mitigate the risk of tipping off, which includes ensuring that the process of gathering information from customers does not lead to such disclosure.

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. Option (b) describes a contract by deed, which requires specific formalities. Option (c) is incorrect because while consideration is a vital element of most simple contracts, the definition of a simple contract itself focuses on the method of formation. Option (d) is incorrect as a contract inferred from conduct is a type of simple contract, not a separate category that excludes verbal or written agreements.

The scenario describes an insurance agent who is also licensed as a travel agent and wishes to engage in restricted scope travel insurance business. According to the provided text, an insurance agent engaging in restricted scope travel business must be licensed as a travel agent under the Travel Agents Ordinance. This requirement is explicitly stated in section 6.2.2(f)(x) of the Code. Therefore, the agent must possess this additional license to legally conduct this specific type of business.

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 insurance companies to manage their exposure to large or numerous claims. Inwards reinsurance, conversely, is when an insurer accepts risk from other insurers, acting as a reinsurer itself. The scenario describes an insurer seeking to reduce its potential liability for a large portfolio of policies, which directly aligns with the definition of outward reinsurance.

The Personal Data (Privacy) Ordinance (PDPO) mandates that data users must obtain consent from data subjects before using their personal data for direct marketing purposes. This consent must be sought after informing the data subject about the intended use and providing a clear channel for them to object. Simply having a contract with a data processor that outlines security measures does not absolve the data user of their primary responsibility to obtain consent for direct marketing activities. While contracts with data processors are crucial for data security and proper handling, they are distinct from the consent requirements for direct marketing under Part VIA of the PDPO.

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, especially when the data was obtained through employment with the original data user. This aligns with the guidance note’s emphasis on not changing the purpose of data use and not making copies of customer information from a former employer for new marketing efforts.

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, cover the same peril, 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 policy covers their interest as owner, while the warehouse operator’s policy covers their interest as a bailee. Since the policies do not cover the same interest, contribution between the insurers will not apply, even though both policies are for indemnity and cover the same loss.

Subrogation is the insurer’s right to step into the shoes of the insured and pursue recovery from a third party responsible for the loss, but only to the extent of the indemnity paid. If the insurer has only partially indemnified the insured due to policy limitations (e.g., a deductible or a specific policy limit that is less than the total loss), the insured retains their right to recover the remaining portion of the loss from the third party. The insurer’s subrogation right is limited to the amount they have paid. Therefore, if the insured recovers more from the third party than the insurer’s payout, the excess belongs to the insured. This principle prevents the insured from being overcompensated for the same loss.

The question tests the understanding of the Motor Insurers’ Bureau of Hong Kong (MIB) and its role in compensating victims of motor vehicle accidents. The MIB is funded by a surcharge on motor insurance premiums and specifically aims to provide compensation when compulsory insurance is absent, ineffective, or the insurer is in liquidation. Option (a) correctly identifies the MIB’s funding mechanism and its purpose in addressing gaps in compulsory motor insurance coverage. Option (b) is incorrect because while the MIB deals with compensation, its primary focus isn’t on facilitating direct claims against uninsured drivers but rather on ensuring victims are compensated when the compulsory insurance framework fails. Option (c) is incorrect as the Employees’ Compensation Insurer Insolvency Bureau (ECIIB) deals with insolvency of employees’ compensation insurers, not motor insurance. Option (d) is incorrect because the Insurance Claims Complaints Bureau (ICCB) handles complaints against insurers and their representatives, not compensation for victims of uninsured or inadequately insured motor accidents.

The scenario describes a situation where a customer is seeking clarification on their existing policy, specifically requesting a duplicate policy document and an amendment to their coverage details. According to the provided syllabus, the Customer Servicing department is responsible for handling such requests, including the issuance of duplicate policies and processing amendments to existing policies. While Marketing and Public Relations are also mentioned, their primary focus is on external image and communication, not direct policy administration. Insurance Sales is focused on product development and sales enhancement, not post-sale policy servicing.

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 concerning the acts disclosed. This defence is specifically linked to the act of reporting suspicious property or financial activities, not to general compliance with anti-money laundering guidelines. Therefore, while adhering to the IA’s Guideline on AML/CFT is crucial for an insurer, it does not automatically absolve them of potential liability under UNATMO if they fail to report suspicious activities as required by the ordinance.

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 with that specific intent, regardless of whether the funds are ultimately used. Option (b) describes making property or services available to a known terrorist or associate, which is a component of terrorist financing but not the overarching definition. Option (c) focuses solely on the collection or solicitation of funds for a terrorist or associate, which is a part of the broader definition but doesn’t cover the provision aspect. Option (d) is incorrect as it misrepresents the core definition by focusing on the source of funds rather than the intent or knowledge of their use for terrorist acts.

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) 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 consequences such as the revocation of registration for a specified period, with additional penalties for false declarations or failure to provide proof of compliance. Therefore, understanding the annual CPD hour obligation is fundamental for continued practice in this sector.

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 court case involving the army officer, broadens the scope of the exclusion. It means that even if the excluded peril (war) is only a remote or indirect cause of the loss, the exclusion will still apply. Therefore, a loss indirectly caused by war, even if the immediate cause was a train accident, would be excluded under such wording. This contrasts with wording like ‘directly caused by’ or ‘proximately caused by’, which are generally interpreted to align with the standard proximate cause rules.

This question tests the understanding of the fundamental principle of indemnity in insurance, specifically how it applies to the valuation of a loss. The principle of indemnity aims to restore the insured to the financial position they were in immediately before the loss occurred, without allowing for a profit or a greater loss. In the context of a damaged motor vehicle, the market value of the vehicle immediately before the damage is the most appropriate basis for calculating the loss. This accounts for depreciation and the vehicle’s condition, ensuring the insured is compensated fairly and not overcompensated. Options (b), (c), and (d) represent incorrect bases for indemnity. The cost of a brand new replacement vehicle (b) would likely result in over-indemnification due to depreciation. The cost of repairs without considering market value (c) might also lead to over-indemnification if the repair cost exceeds the pre-loss market value. The agreed value in the policy (d) is relevant for total loss scenarios or specific agreed value policies, but for partial losses, the market value before the loss is the standard for indemnity.

Guidance Note 4 (GN4) on Misconduct, issued by the IARB, specifically addresses the conduct of insurance agents. A key directive within this guidance is that agents must not allow customers to sign blank or incomplete forms. Any modifications to a form must be initialed by the customer to ensure transparency and prevent potential fraud or misrepresentation. This practice safeguards both the policyholder and the insurer by maintaining the integrity of the application process.

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.

The Insurance Claims Complaints Bureau (ICCB) is designed to handle complaints from individual policyholders concerning personal insurance claims. The Panel, appointed by the ICCB, has the authority to make awards against insurers. A key aspect of the Panel’s power is that an insurer cannot appeal an award made against them. However, if a complainant is dissatisfied with the award, they retain the right to pursue legal avenues for redress. This distinction highlights the finality of the Panel’s decision for the insurer, while preserving the complainant’s options.

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, 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 property and the same peril (fire), they are insuring different interests: the owner’s interest in the building and the tenant’s interest in the improvements. Since the interests covered are different, contribution between the insurers will not apply.

The ‘single article limit’ in a household contents policy is a clause designed to protect insurers from situations where a single, highly valuable item constitutes a disproportionately large percentage of the total sum insured for all contents. If an insured item’s value is not specifically declared and insured separately, the policy will cap the payout for that item to a predetermined limit, even if the actual loss exceeds this cap. This prevents a situation where the insurer is unaware of and exposed to the risk of a single, extremely valuable item being lost, which could represent a significant portion of the overall policy coverage. The insured has the option to declare such items and have them insured for their specific value, thereby increasing the sum insured for that particular item and ensuring a more accurate indemnity.

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’s Registration Board (IARB). According to the provided text, if an RP fails to respond to a request from the IARB to produce proof of compliance with CPD requirements, their registration should be revoked for a specified period determined by the IARB. Furthermore, their future registration applications will not be processed unless they can provide the necessary proof of compliance. Therefore, the most appropriate consequence is the revocation of registration for a period and the requirement to provide proof for future applications.

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. The insurer can only recover the amount it paid out in indemnity, not more. This principle is crucial for preventing unjust enrichment and ensuring that the party at fault bears the ultimate financial responsibility. The question tests the understanding of the insurer’s rights and limitations under subrogation, specifically that the recovery is capped at the indemnity amount paid.

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 policy features: ‘section limit’ applies to distinct sections of a policy (e.g., property damage vs. liability), ‘reinstatement insurance’ or ‘new for old’ cover means no depreciation is deducted, and ‘agreed value policies’ fix the sum insured based on expert valuation, typically for high-value items where depreciation is minimal.

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. However, it specifically excludes individuals who are solely Responsible Officers or Technical Representatives, as these roles are defined in relation to an Insurance Agency or an Individual Agent, rather than being the primary definition of an agent themselves. Therefore, a Responsible Officer or a Technical Representative, by their specific exclusion from the primary definition, are not considered ‘Insurance Agents’ in their own right under the Code’s foundational definition.

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 customer behavior and transaction patterns, and to conduct Customer Due Diligence (CDD) in a manner that avoids raising suspicion. The Guideline emphasizes that FIs are responsible for ensuring their staff are adequately trained and aware of these risks, particularly when dealing with potentially suspicious transactions. Therefore, the most comprehensive approach to preventing tipping off during CDD involves a combination of thorough staff training on recognizing suspicious activities and a careful approach to customer interactions during the CDD process.

The question tests the understanding of how insurers might internally classify their business operations for management and control. While the IIQE syllabus outlines statutory classes of business for authorization purposes, insurers have flexibility in their internal departmental structures. Classifying business by the source of acquisition (agents, brokers, direct) is a common and practical method for managing distribution channels, tracking performance, and understanding client acquisition costs. The other options represent different classification approaches: departmental (by class of business), client type (personal vs. commercial), or academic/functional (subject matter of insurance), none of which are as directly tied to the *how* business is obtained for internal management as the source of business.

The scenario describes an insurance practitioner who, upon changing employers, copies customer information from their previous company. This action directly violates the principle of lawful and fair means of data collection, as outlined in Data Protection Principle 1. Specifically, it constitutes an improper use of personal data obtained under a previous employment context for the benefit of a new employer, without the customers’ consent or a legitimate basis for the new purpose. The guidance note explicitly advises against making copies of customer information from a former employer for marketing purposes with a new company, as this is unlikely to align with the original purpose for which the data was collected. Therefore, the practitioner’s actions are not compliant with data protection regulations.

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 exclusion applies even if the excluded peril (war) was only a remote or indirect cause of the loss. Therefore, if a policy excludes losses ‘directly or indirectly’ caused by a specific peril, and that peril contributes to the loss in any way, even remotely, the loss is not recoverable. This contrasts with wording like ‘directly caused by’ or ‘proximately caused by’, which are generally interpreted to mean the same as proximate cause rules.