IIQE Paper 1 Principles and Practice of Insurance Examination Quiz 07

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. Therefore, an insurance policy that facilitates illegal activities would be void due to illegality.

The Insurance Claims Complaints Bureau (ICCB) is a key external dispute resolution body for policyholders in Hong Kong. Its panel is empowered to make awards against insurers. A crucial aspect of the ICCB’s function is the limit on the monetary value of awards it can issue. This limit is set at HK$800,000. While the insurer cannot appeal an award made by the Panel, a complainant who is dissatisfied with the outcome has the option to pursue legal recourse. Therefore, understanding this monetary ceiling is essential for comprehending the scope of the ICCB’s authority and the avenues available to dissatisfied complainants.

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 tip off a customer or another party about an ongoing investigation related to money laundering or terrorist financing (ML/TF). This involves training staff to recognize suspicious activities by understanding normal customer behavior and transaction patterns. When an FI suspects ML/TF, the CDD process must be conducted with extreme caution to avoid any actions that could be construed as tipping off. This proactive approach is crucial for maintaining the integrity of anti-money laundering efforts and is a key requirement under relevant guidelines.

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 item. 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 loss, again exceeding strict indemnity. Reinstatement insurance allows the insured to repair or replace the lost or damaged property to its condition immediately before the loss, often with new materials. This can also result in a payout exceeding the depreciated value of the original item. 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 underinsured, the claim payout is reduced proportionally, thus enforcing indemnity rather than exceeding it.

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 subrogation sharing, the insurer is typically reimbursed first for the amount they paid out. Any recovery beyond the insurer’s payout, up to the total loss, then goes to the insured. If the recovery is less than the insurer’s payout, the entire recovery goes to the insurer. 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 its payout of $40,000. The remaining $5,000 ($45,000 – $40,000) is then applied to the insured’s loss. Since the insured’s loss was $10,000 and $5,000 has been recovered for them, the insured still bears $5,000 of the loss. Therefore, the insured receives $5,000, and the insurer receives $40,000, totaling the $45,000 recovered.

The question tests the understanding of the minimum paid-up capital requirements for authorized insurers in Hong Kong. According to the provided text, a general business insurer must have a minimum paid-up capital of HK$10 million. If the insurer carries on both general and long-term business (composite insurer), the minimum paid-up capital requirement increases to HK$20 million. A captive insurer has a different minimum requirement of HK$2 million. Therefore, an insurer solely conducting general business requires a minimum of HK$10 million.

The question tests the understanding of how salvage value impacts the indemnity provided by an insurer. When damaged property has residual value (salvage), this value is factored into the calculation of the loss. The insurer can either deduct the salvage value from the payout, allowing the insured to retain the salvaged item, or the insurer can take possession of the salvage and dispose of it, effectively covering the full loss. Option (a) accurately reflects the principle that the insurer’s liability is reduced by the value of the salvage when the insured retains it. Option (b) is incorrect because it describes a situation where the insurer pays the full loss and also keeps the salvage, which is a different method of handling salvage. Option (c) is incorrect as it suggests the salvage value is added to the payout, which is contrary to the principle of indemnity. Option (d) is incorrect because it implies salvage is only relevant in marine insurance, whereas it applies to other classes of property insurance as well.

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.

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 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 constraints.

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 permit customers to sign any policy-related documents that are incomplete. Furthermore, any modifications made to these forms after the customer has signed must be initialed by the customer to ensure transparency and prevent potential disputes or fraudulent alterations. This practice is crucial for protecting the insuring public from misrepresentation and forgery.

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 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, an agreement to sell counterfeit goods, which is an illegal activity, would render the contract unenforceable due to a breach of the legality requirement.

The question tests the understanding of the essential elements required for a legally binding simple contract, as per Hong Kong contract law principles relevant to the IIQE syllabus. A valid contract typically requires an offer, acceptance of that offer, consideration (something of value exchanged between parties), and the legal capacity of the parties to enter into such an agreement. All four elements are fundamental for a contract to be enforceable. Option (a) is incorrect because it omits consideration and capacity. Option (b) is incorrect as it omits acceptance and capacity. Option (c) is incorrect because it omits offer and capacity. Therefore, all four elements are necessary for a valid simple contract.

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 Insurance Authority (IA) mandates specific minimum requirements for individuals seeking to operate as insurance brokers or to be appointed as Chief Executives of insurance broking firms. These requirements are designed to ensure competence and professionalism within the industry. One crucial aspect is the need for a minimum educational standard, which is Form 5 or its equivalent, and the applicant must be at least 21 years old. Beyond these foundational criteria, the IA specifies either acceptable insurance qualifications coupled with two years of management experience in the insurance sector, or, in the absence of such qualifications, a minimum of five years of insurance industry experience with at least two years in a management role. Furthermore, for those dealing with long-term or investment-linked insurance products, passing the relevant Investment-linked Long Term Insurance Paper of the IIQE is necessary, unless specific exemptions apply. Therefore, a candidate must meet these stipulated educational, age, and experience benchmarks, along with any necessary examination passes, to be considered for authorization.

The Insurance Agents Registration Board (IARB) is the body responsible for registering insurance agents and handling complaints against them, as outlined in the Code of Practice for the Administration of Insurance Agents. While the Insurance Claims Complaints Bureau and Panel deal with claims-related disputes, and the Insurance Ordinance provides the overarching regulatory framework for the industry, the IARB specifically focuses on the conduct and registration of agents.

Guidance Note 4 (GN4) issued by the IARB (now part of the HKFI) provides specific directives on ethical conduct for insurance agents. A key principle highlighted is the prohibition of accepting blank or incomplete proposal forms from clients. This rule is in place to safeguard policyholders from potential misrepresentation or fraudulent activities. Any necessary amendments to a form must be explicitly acknowledged and initialed by the customer to ensure transparency and consent. Therefore, an agent who asks a client to sign a form that is not fully completed is acting contrary to this guidance.

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. Facultative reinsurance is a specific type of reinsurance where each risk is negotiated separately, which is not the general concept being tested here. Treaty reinsurance is a broader agreement covering a portfolio of risks, but the core action of an insurer seeking to offload its own risk is outward reinsurance.

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 question tests the understanding of the minimum net asset requirements for different types of insurance brokers. 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. Therefore, the incorporated broker has a higher overall financial requirement.

The HKFI’s ‘Guidelines on Complaint Handling’ emphasize that insurers must ensure customers are aware of how and where to lodge complaints. This includes making the internal complaint handling procedures readily available. Publishing these procedures, providing access in all offices, and supplying them freely to customers upon request or automatically to complainants are key components of ensuring accessibility. Informing new customers about the existence of these procedures is also a crucial step in this process.

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 portion 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 or the overall sum insured. This prevents a situation where a single loss on one item could effectively exhaust the entire policy limit, leaving other insured items unprotected. The question tests the understanding of this specific risk management tool within general insurance policies.

This question tests the understanding of how an agency agreement is terminated due to a fundamental breach by one of the parties. According to agency law, if either the principal or the agent commits a significant violation of the contract’s terms, the non-breaching party has the right to consider the agreement terminated. This termination can occur even if the contract has a fixed duration. The scenario describes a principal appointing a second agent while an exclusive agency agreement is still in effect, which constitutes a fundamental breach of the exclusivity clause. The agent, upon discovering this breach, can cease performing their duties and seek compensation for the loss of expected profits for the remaining term of the agreement. This aligns with the principle that a material breach allows the innocent party to end the contract and claim damages.

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 disclosure requirements when personal data is transferred to a third party for direct marketing purposes, particularly when there is a financial transaction involved.

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. Crucially, this definition explicitly includes both ‘Individual Agents’ (natural persons) and ‘Insurance Agencies’ (businesses structured as sole proprietorships, partnerships, or corporations). However, it specifically excludes ‘Responsible Officers’ and ‘Technical Representatives’ from the definition of an ‘Insurance Agent’ itself, as these roles are defined in relation to an Insurance Agency or an Individual Agent, rather than being agents in their own right under the Code’s primary definition. Therefore, a Responsible Officer, while a key figure in an insurance agency’s operations and conduct, is not classified as an ‘Insurance Agent’ according to the Code’s specific exclusionary clause.

Insurable interest is a fundamental principle in insurance, requiring the policyholder to have a legitimate financial stake in the subject matter of the insurance. This interest must exist at the time of the loss for indemnity insurance, but for life insurance, it is only required at the policy’s inception. A property management company, acting as an agent for building owners, can secure insurance for the building. While the property management company itself might not have direct ownership, its authority from the principals (building owners) to arrange insurance means it possesses the same insurable interest as the principals for the purpose of effecting the insurance. Therefore, if the property management company is designated as the insured in a fire insurance policy for a building it manages, the policy is valid because the insurable interest stems from the principals it represents.

Guidance Note 4 (GN4) issued by the IARB (now part of HKFI) provides specific directives to ensure ethical conduct and customer protection in insurance sales. One of the key requirements is that insurance agents must not allow customers to sign any policy-related documents that are incomplete. Furthermore, any amendments made to a form after the customer has signed must be initialled by the customer to confirm their agreement to the changes. This prevents potential disputes arising from altered documents or misrepresentations. Option B is incorrect because while agents must ensure honesty, the specific prohibition is against signing blank or incomplete forms, not necessarily against discussing future policy changes. Option C is incorrect as the CPD form is mandatory for life assurance policies, but the question is about general document handling. Option D is incorrect because while principals have oversight responsibilities, the specific action described relates to the agent’s direct interaction with the customer and the integrity of the documentation process.

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 intermediaries or their principals.

A registered person selling long-term insurance must make reasonable efforts to ensure the policy aligns with the client’s disclosed needs and financial capacity. This includes understanding the client’s situation and recommending a suitable product, rather than pushing any available policy. The other options describe actions that are either not explicitly required or are potentially misleading.

The Insurance Agents Registration Board (IARB) is the body responsible for registering insurance agents and handling complaints against them, as outlined in the Code of Practice for the Administration of Insurance Agents. While the Insurance Claims Complaints Bureau and Panel deal with claims-related disputes, and the Insurance Ordinance provides the overarching regulatory framework, the IARB specifically addresses the conduct and registration of agents.