IIQE Paper 1 Principles and Practice of Insurance Examination Quiz 05

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. This is a fundamental right to ensure the accuracy and integrity of personal data held by organizations.

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 an insurer in exchange for a premium. The other options represent ancillary benefits or broader economic impacts, not the fundamental role of insurance.

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, again exceeding strict indemnity. Reinstatement insurance allows the insured to repair or replace the lost or damaged property to a condition substantially the same as it was before the loss, without deduction for depreciation. This can also lead to 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 at the time of the loss. If the property is underinsured, the payout will be less than the loss, enforcing indemnity rather than exceeding it. Therefore, ‘New for Old’ cover, Agreed value policies, and Reinstatement insurances are the provisions that can result in more than indemnity being payable.

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 the likelihood and potential cost of a loss. Arranging the launch of a new policy product is typically a responsibility of the product development or marketing departments, involving market research, pricing, and strategic planning. Therefore, both determining risk insurability and arranging new product launches are outside the typical scope of an Accounts department.

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. 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 limit’ applies to distinct parts of a policy covering different risks or subject matters.

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. Therefore, each insurer is liable for the full amount of the loss they cover, up to their respective policy limits.

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.

This question tests the understanding of an insurance intermediary’s role in preventing and reporting insurance fraud, specifically concerning fraudulent claims. While an intermediary is not a law enforcement officer, they have a duty not to assist in fraud and to report suspicions. This includes being aware of suspicious circumstances, doubtful documentation, or verbal cues that suggest a claim might be fraudulent. The key is to assist the insurer and the law in resisting and revealing fraud, but with sensitivity, as the insurer is primarily responsible for investigating and alleging fraud.

Contribution between insurers applies when multiple policies cover the same loss. For contribution to apply, several conditions must be met. These include that each policy must provide 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), the key distinction is that 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. Therefore, each insurer is liable to indemnify their respective policyholder for the loss to the extent of their policy coverage, without the need to contribute to each other.

The Insurance Agents Code of Conduct, as outlined in the IIQE syllabus, emphasizes the importance of clear and accurate sales materials. This includes ensuring that all promotional content is up-to-date, factually correct, and presented in a manner that the public can easily understand, thereby preventing any misleading impressions. Option (b) is incorrect because while accuracy is important, the primary focus of sales materials is on clarity and preventing misrepresentation. Option (c) is incorrect as the code does not mandate that sales materials must be approved by the HKFI; rather, it focuses on the content and presentation. Option (d) is incorrect because while agents should be knowledgeable, the code’s specific guidance for sales materials pertains to their content and clarity, not the agent’s personal knowledge base.

The core of underwriting in general insurance, unlike life insurance, is its dynamic nature. Because general insurance policies are subject to renewal and can be cancelled by the insurer, underwriting is not a singular, fixed event. Insurers can continuously monitor risks and adjust terms or decide on renewal based on performance and changing circumstances. This allows for a less centralized approach to underwriting compared to life insurance, where the commitment is long-term and changes are difficult to implement without policyholder consent. Therefore, the ability to review and adjust terms at renewal is a key characteristic of general insurance underwriting.

The Insurance Authority (IA) is responsible for overseeing the conduct of insurance intermediaries. When an applicant for registration as a Registered Person is undergoing the approval process, the appointing Principal or Insurance Agent has a duty to inform the IA of any changes in the applicant’s circumstances that might influence the IA’s decision. This proactive disclosure is crucial for maintaining the integrity of the registration process and ensuring that only fit and proper individuals are registered. Failure to provide such information could lead to the application being rejected or, if registered, potential disciplinary action.

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 in advising their clients. Failure to do so, leading to a client’s loss, can constitute professional negligence. In such cases, the client has the right to seek compensation from the broker. To mitigate the financial risks associated with such claims, insurance brokers are mandated to maintain Professional Indemnity Insurance. This insurance covers legal costs and damages arising from claims of negligence or other professional errors.

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.

This question tests the understanding of product development in the context of insurance, specifically how insurers adapt to market trends and competition. Product research is the systematic process of identifying and evaluating new insurance products or modifications to existing ones. This involves analyzing market needs, competitor offerings, and emerging risks to ensure the insurer’s portfolio remains relevant and competitive. Developing new forms of cover, whether as standalone products or as a package, is a direct outcome of effective product research and development, aligning with the goal of keeping pace with market dynamics and customer demands.

The question tests the understanding of how insurers internally classify their business operations. While regulatory classifications exist (like Classes 8-17), insurers often adopt practical classifications for management. The ‘Source of Business’ approach categorizes business based on how it was acquired, such as through agents, brokers, or directly from the public. This aids in managing distribution channels and assessing their effectiveness. Classifying by ‘Departmental’ (Class of Business) is also common, but the ‘Source of Business’ is a distinct and recognized internal management classification. ‘Type of Client’ (individual vs. commercial) is another internal classification, but ‘Source of Business’ is a more direct answer to how business is obtained. ‘Academic Classification’ is for study and examination, not internal management.

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, where a breach of these promises can lead to legal recourse. An insurance policy itself is the document that evidences the contract, not the contract itself. The contract is the underlying agreement that the policy represents. Therefore, the most accurate and encompassing definition of a contract is a legally enforceable agreement.

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 they have paid out as indemnity, meaning they cannot profit from the recovery. While subrogation can arise from various legal bases such as tort, contract, or statute, its core function is to transfer the insured’s recovery rights to the insurer.

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 maintain clear lines of responsibility within the insurance industry. The regulation aims to ensure that intermediaries clearly represent either the insurer (as an agent) or the policyholder (as a broker), rather than attempting to serve both capacities, which could compromise their advice and fiduciary duties. Therefore, an individual acting as an appointed insurance agent for one insurer cannot also be an authorised insurance broker.

This question tests the understanding of subrogation, specifically how it operates when an insurer has only partially indemnified a loss due to policy limitations. Subrogation allows an insurer to step into the shoes of the insured to recover from a third party responsible for the loss. However, the insurer’s recovery is generally limited to the amount they have paid. If the insurer paid less than the full loss (e.g., due to a deductible or a policy limit), and the insured also suffered an unreimbursed portion of the loss, the insured retains a proportionate interest in any recovery from the third party. This ensures the insured is not unjustly enriched by the subrogation recovery and that the insurer does not recover more than its payout. Therefore, if the insurer paid only a portion of the loss, and the insured also bore a portion, any recovery from the negligent third party would be shared proportionally between the insurer and the insured.

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 measure of loss. This accounts for depreciation, wear and tear, and any other factors affecting its value. Option (b) is incorrect because replacement with a new vehicle would put the insured in a better position than before the loss. Option (c) is incorrect as salvage value is what remains after the loss, not the value of the loss itself. Option (d) is incorrect because the cost of repairs might exceed the pre-loss market value, leading to over-indemnification.

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 requirements, including those related to financial soundness, operational capabilities, and professional conduct. While the broker must also disclose their registration number upon request and on business cards, and provide a Customer Protection Declaration for new long-term policies, these are separate obligations from the annual financial reporting and auditor’s confirmation of meeting minimum standards.

This question tests the understanding of how proximate cause operates when multiple perils are involved in a loss, specifically focusing on the relationship between insured and uninsured perils in a chain of events. According to the principles of proximate cause, if an uninsured peril leads to an insured peril, and the insured peril then causes the loss, the loss is generally recoverable. In this scenario, the master’s negligence (uninsured peril) led to a collision (uninsured peril), which in turn caused a fire (insured peril). The fire then led to an explosion (insured peril), and the explosion caused leaks, resulting in water damage (uninsured peril). The key is that the loss by water damage was proximately caused by the explosion, which is an insured peril. Therefore, the loss is recoverable under the policy that covers explosion, even though the chain of events began with uninsured perils.

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 is limited to the amount they have paid. If the recovery from the third party exceeds the insurer’s payout, the excess belongs to the insured. In this scenario, the insurer paid HK$80,000 on a HK$100,000 loss. The recovery from the negligent party is HK$90,000. The insurer is entitled to recover only the amount they paid, which is HK$80,000. The remaining HK$10,000 (HK$90,000 recovery – HK$80,000 insurer payout) rightfully belongs to the insured, as it represents the unreimbursed portion of their loss.

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 specifically listed as direct intervention powers in the context of managing rapid growth or potential difficulties arising from new business volume.

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 fails to declare such an item and have it specifically insured for its value, the policy will cap the payout for that item to a predetermined limit, even if the actual loss exceeds this limit. This is to manage the insurer’s risk exposure, particularly concerning theft of high-value items. The other options describe different policy features: ‘reinstatement insurance’ and ‘new for old’ cover relate to how claims are settled without deductions for depreciation, and ‘section limit’ applies to specific sections within a policy covering different types of risks or subject matter.

The scenario describes an insurance agent meeting a client outside the usual office environment. The core principle being tested is the agent’s responsibility to protect the client’s personal data and ensure confidentiality of conversations. This aligns with the guidance provided for insurance agents and representatives handling customer data outside the workplace, emphasizing the need to prevent unauthorized access or overhearing of sensitive information. Option (a) directly addresses this responsibility by focusing on safeguarding data and maintaining privacy during client interactions in public spaces. Option (b) is incorrect because while customer consent is important, it doesn’t negate the primary duty of data protection in public. Option (c) is irrelevant as it discusses the general concept of data security without specific application to the scenario. Option (d) is also incorrect because while reporting suspicious activities is a general compliance requirement, the immediate concern in this scenario is the physical and auditory protection of data during the meeting.

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 the omission was not fraudulent, it still breaches the duty of utmost good faith. Option C is incorrect because the duty of utmost good faith requires disclosure of material facts, not just those that are life-threatening. Option D is incorrect because the absence of a direct question about the specific condition does not absolve the applicant of their duty to disclose material facts under the principle of utmost good faith.

Renewal of an insurance contract, as per the provided syllabus, legally constitutes the establishment of a new agreement. This means that upon renewal, the terms and conditions of the policy are subject to re-evaluation and potential modification by the insurer, rather than simply extending the existing contract’s provisions without change. The insurer has the right to adjust premiums, introduce new terms, or even decline renewal based on updated risk assessments or company policy, reflecting the creation of a fresh contractual relationship.

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 up to HK$8,000 from the third party. The insured retains the right to pursue the remaining HK$2,000 if their total loss was indeed HK$10,000.