IIQE Paper 1 Principles and Practice of Insurance Examination Quiz 06

The Insurance Authority (IA) mandates that insurance brokers must submit annual audited financial statements and an auditor’s report within six months of their financial year-end. This auditor’s report specifically confirms adherence to minimum regulatory requirements, including those related to financial soundness and operational capabilities. While a broker must disclose their registration number upon request and on business cards, and provide a Customer Protection Declaration for new long-term policies, these are distinct obligations from the annual financial reporting and auditor’s confirmation of compliance with minimum requirements.

The question tests the understanding of the minimum paid-up capital requirements for authorized insurers in Hong Kong, specifically for a captive insurer. According to the provided text, a captive insurer has a minimum paid-up capital requirement of HK$2 million. The other options represent different scenarios or incorrect figures. HK$20 million is for carrying on both General and Long Term business, HK$10 million is the minimum for General Business (unless carrying on statutory insurance business), and HK$50 million is a general minimum for authorized insurers not otherwise specified.

The question tests the understanding of the minimum net asset requirements for an incorporated insurance broker. According to the regulations, an incorporated insurance broker must maintain a minimum net asset value of HK$100,000 and a minimum paid-up share capital of HK$100,000 at all times. Option A correctly states these requirements. Option B is incorrect because it only mentions net assets and not paid-up share capital. Option C is incorrect as it suggests a lower net asset requirement and no paid-up capital requirement. Option D is incorrect because it specifies a higher net asset requirement and a different paid-up capital requirement.

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, a contract for the sale of prohibited substances would be void due to illegality.

An insurance broker, by holding themselves out as an expert, owes a higher duty of care to their clients. This means they must exercise reasonable skill and diligence when advising clients. Failure to do so, leading to a client’s loss, can constitute professional negligence. In contrast, an insurance agent’s primary responsibility is to the insurer, and their duty of care to the policyholder is generally considered lower unless they profess specialized skills. Consequently, insurance brokers are typically required to maintain Professional Indemnity Insurance to cover potential claims arising from such negligence, whereas this is not a statutory requirement for insurance agents.

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.

This question tests the understanding of the responsibilities of an authorized insurer concerning its members’ financial reporting and auditor reviews, as stipulated by relevant regulations. Specifically, it focuses on the insurer’s duty to ensure that its members submit their financial statements and auditor’s reports as per membership rules. Furthermore, it highlights the insurer’s obligation to review these auditor reports for any adverse statements or qualifications that were not disclosed by the member in their own report. This ensures transparency and adherence to financial standards within the membership.

This question tests the understanding of the responsibilities of an authorized insurer concerning its members’ financial reporting and auditor reviews, as stipulated by relevant regulations. Specifically, it focuses on the insurer’s duty to ensure that its members submit their financial statements and auditor’s reports as per membership rules. Furthermore, it highlights the insurer’s obligation to review these auditor reports for any adverse statements or qualifications that were not previously disclosed. The correct answer reflects both of these crucial oversight functions.

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.

This question tests the understanding of the core functions within an insurance company and the division of responsibilities. The Accounts department is primarily concerned with financial transactions, record-keeping, and managing the monetary aspects of the business. Determining the insurability of a risk falls under the purview of underwriting, which involves assessing and evaluating potential risks to decide whether to accept them and on what terms. Arranging the launch of a new policy product is a strategic and marketing function, typically handled by product development, marketing, or actuarial departments, not the accounts department. Therefore, both determining risk insurability and arranging new product launches are outside the typical responsibilities of an accounts department.

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 oversight mechanisms to ensure a data processor adheres to data protection requirements, even if a formal contract is not in place for all aspects of data handling, such as the return or destruction of data.

Guidance Note 6 (GN6) clarifies that an insurance agent, Responsible Officer, or Technical Representative cannot solicit or conduct insurance business for a principal before receiving written confirmation of their registration from the Insurance Authority Registration Board (IARB). Acting as an unregistered agent is an offense under Section 77 of the Insurance Ordinance, potentially leading to prosecution. Similarly, a Responsible Officer or Technical Representative cannot act in their capacity before their registration is confirmed by the IARB, as this constitutes a breach of the Code and can impact their fitness and properness.

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 alert a customer or another party that their activities are under scrutiny for potential money laundering or terrorist financing (ML/TF). This includes training staff on how to conduct customer inquiries in a manner that avoids such ‘tipping off’. The guideline emphasizes that knowing the customer’s usual activities is key to identifying unusual patterns, and staff, including appointed insurance agents, need to be adequately trained to recognize and report suspicious transactions. The risk of tipping off must be considered during the Customer Due Diligence (CDD) process when a suspicion has already been formed.

This question tests the understanding of the fundamental principles of risk management and insurance, specifically the distinction between different types of risks. A pure risk is one where there is only the possibility of loss or no loss, with no chance of gain. Speculative risk involves the possibility of both gain and loss. Fundamental risk affects a large segment of the population or economy, while particular risk affects only individuals or specific groups. The scenario describes a situation where a business faces potential financial harm due to a natural disaster, which is a classic example of a pure risk as there is no potential for financial gain from the event itself, only the possibility of loss.

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 to be payable. In the context of a landlord insuring against loss of rent due to a fire, the landlord has a direct financial interest in receiving rent. If a fire occurs, the ability to collect rent is jeopardized, creating a potential financial loss. Therefore, the landlord possesses insurable interest in the rental income, allowing them to insure against this specific risk. The other options describe situations where insurable interest might not be present or is not the primary basis for insurance coverage. Insuring a stranger’s life without a familial or financial dependency would lack insurable interest. A business partner insuring the life of another partner without a specific buy-sell agreement or financial interdependence might also face challenges proving insurable interest. Similarly, insuring a competitor’s property is not a valid basis for insurable interest.

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), and the insured recovers an amount from a third party that covers the entire loss, the insurer is entitled to recover its payment. However, the insured retains any amount recovered that exceeds the insurer’s payout and their own uninsured portion of the loss. In this scenario, the insurer paid HK$50,000 of a HK$80,000 loss. The insured then recovered HK$70,000 from the negligent party. The insurer’s subrogation right is limited to the amount it paid, which is HK$50,000. The remaining HK$20,000 of the recovery (HK$70,000 – HK$50,000) belongs to the insured, as it covers the remaining portion of their loss (HK$80,000 – HK$50,000 = HK$30,000) and leaves them with a net loss of HK$10,000. Therefore, the insurer can claim HK$50,000 from the recovery.

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. The other options describe different aspects of insurance operations or regulatory functions that are not directly related to the definition and purpose of these approved bodies.

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 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 the loss. 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, which can also result in a payout exceeding the depreciated value. 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. If the property is underinsured, the payout will be less than the loss, enforcing indemnity rather than exceeding it.

The core of underwriting in general insurance involves a continuous assessment of risks. Unlike life insurance, where underwriting is a one-time event for individual policies, general insurance policies are subject to renewal. This renewal process allows the insurer to re-evaluate the risk profile of the insured and adjust the terms, conditions, or premiums accordingly. If the risk deteriorates or becomes unacceptable, the insurer has the option to not renew the policy or to impose stricter terms. This dynamic nature of risk assessment and adjustment is a defining characteristic of general insurance underwriting, distinguishing it from the more static underwriting of life insurance.

This question tests the understanding of ‘Non-fraudulent Non-Disclosure’ as a breach of utmost good faith. It arises when a party, without intent to deceive, fails to reveal material facts. The scenario describes an applicant for travel insurance who omits mentioning a pre-existing medical condition that is not life-threatening but could affect the insurer’s assessment of risk. This omission, even if unintentional, constitutes a failure to disclose a material fact, which is a breach of the duty of utmost good faith. Option B is incorrect because while ‘Ordinary Good Faith’ also involves honesty, it primarily addresses deliberate misrepresentation or lying, not innocent or negligent omissions. Option C is incorrect as ‘Utmost Good Faith’ is a broader principle encompassing both honesty and the proactive disclosure of material facts, and the scenario specifically highlights a failure in disclosure. Option D is incorrect because ‘Particular Risk’ refers to the scope of a risk’s impact, not the duty of disclosure.

This question assesses understanding of the Insurance Authority’s (IA) oversight responsibilities concerning the financial health and compliance of its members, specifically focusing on the review of financial statements and auditor reports. The IA is mandated to ensure that its members adhere to membership rules and regulations, which includes verifying the receipt and adequacy of financial statements and auditor’s reports. A key aspect of this oversight is the review of these reports for any adverse statements or qualifications that might indicate financial instability or non-compliance. The IA’s role is to identify and address any such issues promptly to maintain the integrity of the insurance market. Therefore, the IA must confirm that it has received these documents and that the auditor’s reports do not contain any unaddressed adverse remarks or qualifications, except those explicitly noted and explained by the auditor.

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 these resources and adhering to their guidance is a proactive measure for an intermediary to uphold ethical standards and prevent illicit activities.

The core principle here is that financial institutions (FIs) must establish robust internal controls to prevent employees from “tipping off” customers or others about suspicious activity investigations. This involves training staff to recognize unusual transactions by understanding normal customer behavior and transaction patterns. When a suspicion of money laundering or terrorist financing (ML/TF) arises, the FI must be mindful of the risk of tipping off during the Customer Due Diligence (CDD) process. The guideline emphasizes that FIs should ensure their staff, including appointed insurance agents, are adequately trained on their roles in AML/CFT, understand what constitutes suspicious activity, and know how to report it internally. The question tests the understanding of the proactive measures an FI must take to prevent tipping off, which includes comprehensive staff training and the implementation of systems that allow for the recognition of unusual activities based on customer knowledge.

This question tests the understanding of ‘Non-fraudulent Non-Disclosure’ as a breach of utmost good faith. It arises when a party, without intent to deceive, fails to reveal material facts. The scenario describes an applicant for travel insurance who omits mentioning a pre-existing medical condition that is not actively causing symptoms but is a known health issue. This omission, even if unintentional, is a failure to disclose a material fact, which could influence the insurer’s decision to offer coverage or the terms thereof. This aligns with the definition of non-fraudulent non-disclosure, which is a breach of the duty of utmost good faith, distinct from deliberate misrepresentation or fraud. Option B describes ‘Ordinary Good Faith,’ which only requires truthful answers to direct questions, not proactive disclosure of all known facts. Option C describes a ‘Performance Bond,’ which is unrelated to insurance contract disclosure. Option D describes ‘Particular Risk,’ which refers to the scope of a risk’s impact, not the duty of disclosure.

The Conduct of Insurance Agents for General Insurance Business and Restricted Scope Travel Business mandates specific professional behaviours. Agents must only offer advice within their areas of expertise, ensuring they possess the necessary knowledge and qualifications. It is crucial for agents to clearly identify themselves and their affiliation before engaging in any business discussions to maintain transparency. When comparing different policies, agents are required to explain the distinctions in coverage and benefits to enable informed decision-making by the client. Furthermore, a fundamental duty is to clearly articulate the policy’s coverage and ensure the client comprehends what they are purchasing, thereby fulfilling the obligation of utmost good faith and preventing misrepresentation. Therefore, all four listed points are essential components of the required conduct.

Principle 6 of the Personal Data (Privacy) Ordinance grants data subjects the right to access and correct their personal data. This means an individual can request a copy of the information an insurance company holds about them, and if they find it inaccurate, they can ask for it to be corrected. The scenario describes a situation where an individual is seeking to obtain their policy details, which directly aligns with this right of access.

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 insured has a claim against a third party for HK$10,000 and the insurer has paid HK$8,000 for the loss, the insurer can only recover a maximum of HK$8,000 from the third party, even if the insured’s total loss was greater.

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 and adherence to prescribed procedures. The IA’s role is to ensure the integrity of the industry, and non-compliance with its directives can lead to additional sanctions.

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 disputes, and the Insurance Ordinance provides the overarching regulatory framework, the IARB specifically focuses on the conduct and registration of agents.

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. The maximum award amount is HK$800,000. Importantly, insurers cannot appeal an award made by the panel. However, a complainant who is dissatisfied with an award can pursue legal recourse. This question tests the understanding of the ICCB’s powers and limitations regarding awards and appeals, a crucial aspect of consumer protection in the insurance sector as outlined in the IIQE syllabus.