IIQE Paper 1 Principles and Practice of Insurance Examination Quiz 04

The question tests the understanding of how policy wording can modify the application of proximate cause rules, specifically focusing on the ‘directly or indirectly’ exclusion. In the scenario, the insured’s death was indirectly caused by war (due to being on duty during wartime and then being hit by a train). The policy excluded losses ‘directly or indirectly’ caused by war. This wording is interpreted by courts to mean that even a remote or indirect link to the excluded peril will void the claim. Therefore, the insurer is not liable because the death, though indirectly, was linked to the war.

This question tests the understanding of an insurance intermediary’s role in preventing corruption and fraud, specifically concerning their interaction with the Independent Commission Against Corruption (ICAC) and relevant guidelines. The ICAC provides resources like ‘Best Practice Packages’ and a ‘Practical Guide on Professional Ethics for Life Insurance Intermediaries’ to help the industry. Intermediaries are encouraged to familiarize themselves with these materials and report corruption cases. Option A is incorrect because while reporting is important, the primary focus of the ICAC’s services for organizations is prevention through guidance and resources. Option C is incorrect as the ICAC’s services are free and confidential, not requiring payment for advice. Option D is incorrect because while the ICAC offers training, the question asks about the intermediary’s proactive engagement with the provided resources to prevent corruption, not just attending training.

An insurance broker has a fundamental duty to act in the best interests of their clients. This principle is paramount and dictates that the client’s welfare should take precedence over any other consideration, including the broker’s own potential gain or convenience. Limiting a client’s choices of insurers without a valid reason would be a breach of this duty, as it restricts the client’s ability to secure the most suitable coverage. Similarly, being overly reliant on a single insurer can lead to a lack of objective advice and potentially disadvantage the client.

The Insurance Ordinance (Cap. 41) mandates that any entity wishing to conduct insurance business in or from Hong Kong must first obtain authorization from the Insurance Authority (IA). This authorization process involves meeting specific minimum requirements set by the Ordinance, which include aspects like paid-up capital, solvency margin, the suitability of directors and controllers, and adequate reinsurance arrangements. The IA also issues Guidelines to further assess an applicant’s financial soundness and ongoing suitability. Therefore, operating an insurance business without this prior authorization from the IA is a violation of the regulatory framework.

The Insurance Authority (IA) and the Insurance Agents Registration Board (IARB) assess whether an individual is ‘fit and proper’ to be registered as an insurance intermediary. A key aspect of this assessment involves reviewing past conduct. Specifically, the Code of Conduct for Persons Licensed by the IA (the Code) outlines criteria for determining fitness and propriety. Clause 6/31 (viii) explicitly states that a person may be considered not fit and proper if they have been found not to have complied with or to be in breach of the Code or the rules of the Hong Kong Federation of Insurers (HKFI). This includes any past disciplinary actions or findings of non-compliance. Therefore, a history of non-compliance with regulatory codes is a direct indicator of potential unsuitability for registration.

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 principles, 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 be immediate, and the aggrieved party may also seek compensation for any losses incurred due to the breach, such as lost profits. The scenario describes a situation where an exclusive agent discovers the principal has appointed another agent before the agreed-upon term, which constitutes a fundamental breach of the exclusivity clause. Therefore, the agent is entitled to end their performance and claim damages.

This question tests the understanding of ‘Non-fraudulent Non-Disclosure’ as a breach of utmost good faith. It occurs when a party, without intent to deceive, fails to reveal material facts. The scenario describes an applicant for travel insurance who, due to an oversight rather than deliberate concealment, fails to mention a pre-existing minor ailment that, while not directly causing the claim, could be considered material to the insurer’s assessment of risk. This aligns with the definition of non-fraudulent non-disclosure, which is an innocent or negligent omission of material facts, distinct from fraudulent misrepresentation or a complete lack of disclosure.

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, questionable documentation, or verbal cues that suggest a claim might be fraudulent. The key is to assist the insurer and the law in combating fraud, but with sensitivity, as the insurer is primarily responsible for investigating and alleging fraud. Option (a) correctly identifies the intermediary’s obligation to report suspicious claims, while (b) and (c) describe actions that could be considered assisting fraud or overstepping their role. Option (d) is too passive and doesn’t reflect the proactive duty to report.

This question tests the understanding of ‘Non-fraudulent Non-Disclosure’ as a breach of utmost good faith. It occurs when a party, without intent to deceive, fails to reveal material facts. The scenario describes an applicant for travel insurance who, due to an oversight rather than deliberate concealment, fails to mention a pre-existing medical condition that is highly relevant to the insurer’s risk assessment. This omission, even if unintentional, constitutes a breach of the duty of utmost good faith, as it involves the failure to disclose a material fact. Option B is incorrect because while the applicant did not intend to deceive, the lack of intent does not negate the breach of utmost good faith in this context. Option C is incorrect because ‘Ordinary Good Faith’ only requires truthful answers to specific questions, not proactive disclosure of all known facts, which is what is tested here. Option D is incorrect because a ‘particular risk’ refers to the scope of consequences of a risk, not the nature of disclosure obligations.

The Insurance Ordinance mandates that authorized insurers maintain adequate reinsurance arrangements. This is a critical component of an insurer’s financial security and is subject to supervisory review by the IA regarding both the quantity and the collectability of the reinsurance. The Guideline on Reinsurance with Related Companies specifically addresses situations where an insurer reinsures with a related entity, aiming to ensure that the insurer’s prudent control over its reinsurance is not compromised, thereby protecting the insuring public. Therefore, the IA’s assessment of reinsurance adequacy is a key aspect of its financial supervision.

The Code of Practice for the Administration of Insurance Agents defines an ‘Insurance Agent’ broadly to encompass individuals and agencies acting on behalf of insurers. Crucially, it explicitly excludes Responsible Officers and Technical Representatives from this definition, as they are considered distinct roles within the agency structure, even though they are registered persons. Therefore, a person who solely acts as a Technical Representative for an insurance agency is not classified as an ‘Insurance Agent’ under the Code’s primary definition.

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.

The scenario describes an individual acting as an insurance agent who also sells MPF schemes. According to the provided text, an insurance agent engaging in selling or advising on MPF schemes is required to register as an MPF intermediary with the MPFA. This ensures compliance with regulations governing both insurance and MPF products, demonstrating a comprehensive understanding of the dual regulatory landscape.

The question tests the understanding of how insurers internally classify their business operations. While regulatory classifications exist (like those in the Insurance Ordinance), insurers have the freedom to organize their internal departments based on their specific needs. The U.S. style classification, which clearly separates Life and Non-Life business, with Non-Life further divided into categories like Fire, Marine, Bonding, and Casualty, is a common and practical approach for internal management and operational efficiency. Classifying by source of business (agents, brokers, direct) or type of client (personal, commercial) are also valid internal methods, but the U.S. style departmental breakdown is a more comprehensive operational classification.

The scenario describes a situation where a customer is seeking clarification on policy terms and conditions, which falls under the purview of handling customer inquiries. According to the syllabus, the Customer Servicing department is responsible for responding to ‘enquiries of every imaginable kind, asking for guidance and information.’ While public relations and documentation are also customer service functions, the core of the customer’s request is information seeking. Marketing and Promotion, while related to public image, do not directly handle individual policy-specific queries. Therefore, the initial point of contact for this type of request would be Customer Servicing.

The Personal Data (Privacy) Ordinance (PDPO) mandates that data users ensure their data processors adhere to data protection principles. A key contractual obligation for data processors is to implement appropriate security measures to safeguard entrusted personal data. This includes an obligation to protect the data by complying with the PDPO’s data protection principles, which are fundamental to the lawful and ethical handling of personal information. While returning or destroying data, prohibiting unauthorized use, and allowing audits are also important contractual terms, the core obligation that underpins all others is the processor’s duty to protect the data in accordance with the law.

The Personal Data (Privacy) Ordinance (PDPO) in Hong Kong is a comprehensive piece of legislation designed to protect the privacy of individuals concerning their personal data. It applies broadly to the collection, holding, processing, and use of personal data by both public and private sector organizations. The Ordinance establishes data protection principles that all data users must adhere to, regardless of whether they are government bodies or commercial enterprises. Therefore, it covers all entities that handle personal data, making option (c) the correct and most encompassing answer.

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 hold this additional license to legally conduct this specific type of business.

The question tests the understanding of market concentration in Hong Kong’s insurance sector, specifically differentiating between General Business and Long Term Business. The provided text indicates that in General Business, the top ten insurers held a 42% market share, with no single insurer exceeding 17% in any class. This suggests a more fragmented market. In contrast, for Long Term Business, the top ten insurers accounted for 75% of the market, and the top insurer held 16%. This higher concentration indicates that Long Term Business is less evenly distributed among authorized insurers compared to General Business. Therefore, the statement that General Business is more evenly distributed than Long Term Business is accurate based on the provided statistics.

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 its 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.

The Insurance Ordinance (Cap. 41) mandates that any entity wishing to conduct insurance business in or from Hong Kong must first obtain authorization from the Insurance Authority (IA). This authorization process involves meeting specific minimum requirements set by the Ordinance, which include aspects like paid-up capital, solvency margin, the suitability of directors and controllers, and adequate reinsurance arrangements. The IA also issues Guidelines to further assess an applicant’s financial soundness and ongoing suitability. Therefore, commencing insurance operations without this prior authorization is a violation of the regulatory framework.

The Insurance Agents Registration Board (IARB) plays a crucial role in the regulation of insurance intermediaries in Hong Kong. According to the provided text, the IARB has the authority to investigate matters related to registration applications, renewals, and complaints against registered persons. It can also refer these matters for investigation and receive reports. Furthermore, the IARB can direct principals or registered persons to take disciplinary action and has the power to register or revoke the registration of insurance agents, responsible officers, and technical representatives. Finally, it is mandated to report breaches of the Insurance Ordinance or the Code to the Insurance Authority (IA) if a registered person is found to be unfit or has contravened regulations. Therefore, all these functions fall within the purview of the IARB’s responsibilities.

The question tests the understanding of ‘Renewal’ in the context of insurance contracts as defined within the IIQE syllabus. Renewal of an insurance contract is legally considered the creation of a new agreement, rather than a simple continuation of the old one. This means that the terms and conditions can be re-evaluated and altered by the insurer at the time of renewal, subject to regulatory requirements. Options B, C, and D describe other insurance concepts: ‘Replacement’ refers to substituting a damaged item, ‘Risk Transfer’ is about shifting the financial burden of risk, and ‘Salvage’ relates to recovering value from damaged property.

This question tests the understanding of how an agency agreement can be terminated due to a fundamental breach by either party. A fundamental breach is a serious violation of the contract’s terms that goes to the root of the agreement, allowing the non-breaching party to treat the contract as ended. In this scenario, the principal appointing a second agent while the first agent has an exclusive agreement constitutes a fundamental breach. The exclusive agent’s right is to terminate the contract and seek compensation for the loss of expected profits during the remaining term of the agreement. Option B is incorrect because while the agent may terminate, they are not necessarily entitled to compensation for the entire contract period, only for the loss incurred due to the breach. Option C is incorrect as the agent’s right is to terminate and claim damages, not to seek specific performance to prevent the principal from appointing another agent, unless the contract specifically allows for it. Option D is incorrect because while the agent can terminate, the primary recourse is to sue for damages, not to seek an injunction without further justification.

The principle of utmost good faith in insurance requires parties to disclose all material facts. A material fact is defined as any circumstance that would influence a prudent insurer’s decision regarding accepting the risk or setting the premium. While a proposer must disclose such facts, certain exceptions exist. Facts that diminish the risk, such as the presence of an automatic sprinkler system, do not need to be disclosed in the absence of an inquiry because they would likely lead to a lower premium, thus not negatively impacting the insurer’s decision-making process in a way that requires proactive disclosure. The other options represent situations that would typically be considered material facts requiring disclosure.

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. 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 the first $40,000 of the recovery. 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.

The Insurance Claims Complaints Bureau (ICCB) is a self-regulatory body established by the insurance industry in Hong Kong. Its primary function is to handle complaints from individual policyholders concerning claims arising from personal insurance contracts with its member insurers. The ICCB’s Insurance Claims Complaints Panel, which handles these complaints, has the authority to make awards against insurers. The maximum award amount the Panel can make is HK$800,000. Insurers cannot appeal an award made by the Panel. However, a complainant who is dissatisfied with the Panel’s award can pursue legal recourse.

The HKFI’s ‘Guidelines on Complaint Handling’ emphasize that insurers must ensure their internal complaint handling procedures are accessible to customers. This includes publishing these procedures, making them available in all offices, providing them freely to customers upon request and automatically to complainants, and informing new customers about their availability. The core principle is that customers should be aware of how and where to lodge a complaint, and the process should be straightforward and transparent. Therefore, an insurer failing to inform new customers about the complaint handling procedures would be in breach of these accessibility requirements.

The duty of utmost good faith, which includes the duty of disclosure, generally applies to material facts known to the proposer before the contract is concluded. However, this duty can be extended or modified by the policy terms. In this scenario, the policy explicitly requires disclosure of material changes in risk during the policy’s term. The insured’s change in occupation, which demonstrably alters the risk profile, falls under this contractual obligation. While common law might defer such disclosure until renewal, the policy’s specific clause overrides this, making immediate disclosure mandatory upon the change occurring. Failure to disclose this material change constitutes a breach of utmost good faith.

The question tests the understanding of the concept of ‘Renewal’ in insurance contracts, specifically as it relates to the continuation of coverage. According to the provided syllabus, ‘Renewal’ is defined as the continuation of an insurance contract for a further period, which legally constitutes a new contract. Option (a) accurately reflects this definition by stating that it involves the continuation of an existing policy for an additional term, thereby forming a new agreement. Option (b) describes ‘Replacement,’ which is about substituting a lost or damaged item. Option (c) refers to ‘Risk Transfer,’ a broader concept of shifting financial responsibility for a potential loss. Option (d) describes ‘Salvage’ in non-marine insurance, which pertains to the remaining value of damaged property.