IIQE Paper 1 Principles and Practice of Insurance Examination Quiz 03

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 insurers to manage their exposure and capacity. Inwards reinsurance, conversely, is when an insurer accepts risk from other insurers, acting as a reinsurer itself. Therefore, an insurer seeking to reduce its own risk burden would engage in outward reinsurance.

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 personal data. Its scope is broad and encompasses both the public and private sectors. This means that government departments, statutory bodies, as well as commercial enterprises and non-profit organizations that handle personal data, are all subject to the provisions of the PDPO. Therefore, the ordinance applies to all entities that collect and process personal data, regardless of whether they operate in the public or private domain.

This question tests the understanding of vicarious liability in the context of data protection under Hong Kong law. The Personal Data (Privacy) Ordinance (PDPO) holds data users responsible for the actions of their data processors. Therefore, if a data processor infringes on a data subject’s privacy, the data subject can seek recourse from the data user, who is considered liable as the principal for the data processor’s wrongful acts. The contract between the data user and data processor can be used as evidence of compliance, but it does not absolve the data user of their primary responsibility to the data subject. The Personal Data (Privacy) Commissioner (PCPC) is the regulatory body, but direct recourse for compensation is against the data user, not the PCPD. The maximum penalty for offences is a fine and imprisonment, but this relates to direct contraventions by the data user or processor, not the avenue for civil redress by the data subject.

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 bodies not directly related to the specific definition of approved bodies of insurance brokers.

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. Option B is incorrect because while brokers must be licensed, the question specifically asks about approved *bodies* that represent them. Option C is incorrect as the Code of Conduct for Insurers applies to insurers, not broker associations. Option D is incorrect because while client accounts are a requirement for brokers, it’s not the primary function of an approved body.

The Insurance Authority (IA) mandates Continuing Professional Development (CPD) for registered persons (RPs) to ensure they maintain their knowledge and skills. Failure to comply with these requirements can lead to disciplinary actions. Specifically, if an RP fails to meet the CPD requirements, the Independent Appeals and Review Board (IARB) may revoke their registration for a period, typically starting with three months. During this revocation period, the RP cannot conduct regulated activities. Upon re-registration, the RP is required to complete all outstanding CPD hours. Making a false declaration about CPD hours is a more serious offense, leading to a longer initial revocation period of twelve months, with the same requirement to complete outstanding CPD upon re-registration. Failure to respond to the IARB’s request for proof of compliance results in a revocation period determined by the IARB, and future registration applications will not be processed without proof of compliance. Therefore, the most direct consequence for an RP failing to meet CPD requirements, as a starting point, is the revocation of their registration for a specified period.

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 ensures the IA can monitor the financial stability of brokers and protect policyholders. While brokers must also disclose their registration number upon request and on business cards, and comply with customer protection declarations for new long-term policies, these are separate obligations from the annual financial reporting.

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 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 contracts with data processors are crucial for data security and handling, the direct marketing provisions under Part VIA of the PDPO outline distinct obligations for the data user themselves when engaging in such activities. Option (b) is incorrect because while data processors have obligations, the question specifically asks about the data user’s actions before direct marketing. Option (c) is incorrect as the PDPO does not mandate the appointment of a data protection officer for all direct marketing activities, but rather specific information disclosure and opt-out mechanisms. Option (d) is incorrect because while data retention policies are important, the primary obligation before direct marketing is informing the data subject and providing an opt-out channel.

The Insurance Ordinance (Cap. 41) mandates that any entity wishing to conduct insurance business in or from Hong Kong must first secure authorization from the Insurance Authority (IA). This authorization process is contingent upon meeting specific minimum requirements stipulated by the Ordinance. These requirements are designed to ensure the financial stability and operational integrity of insurers, thereby safeguarding policyholder interests. The minimum paid-up capital requirement varies based on the type of insurance business undertaken. Specifically, HK$10 million is the minimum for entities solely engaged in general or long-term business, excluding compulsory insurance. However, if an entity conducts any form of statutory or compulsory insurance business, whether exclusively or in conjunction with other insurance activities, the minimum paid-up capital requirement escalates to HK$20 million. This tiered capital requirement reflects the potentially higher risks and responsibilities associated with compulsory insurance lines.

The question tests the understanding of the ‘Fitness and Properness’ criteria for registered persons, as outlined in Part E of the Code of Practice for the Administration of Insurance Agents. This section details various requirements and limitations that an individual must meet to be considered suitable for registration. Specifically, it addresses situations where an individual might be deemed not fit and proper, such as having a history of fraud or misrepresentation in financial dealings. Option A correctly identifies that a history of fraudulent misrepresentation in financial dealings would directly impact an individual’s fitness and properness for registration, as it demonstrates a lack of integrity and trustworthiness, which are fundamental requirements for insurance intermediaries. Option B is incorrect because while a temporary financial difficulty might be a concern, it’s the pattern of dishonesty (fraudulent misrepresentation) that is the primary disqualifier. Option C is incorrect as a lack of specific product knowledge, while needing to be addressed through training, does not inherently make someone unfit or improper in the same way as dishonesty. Option D is incorrect because while regulatory compliance is important, the question specifically asks about the direct impact on fitness and properness, and a past minor breach that has been rectified is less impactful than ongoing or severe misconduct like fraud.

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 company’s monetary assets and liabilities. Options (i) and (ii) both fall under the purview of financial management and are typical responsibilities of an accounts department. Specifically, collecting unpaid premiums is a crucial aspect of revenue management, and paying outstanding bills is a fundamental operational expense. Conversely, determining the insurability of a risk is the core function of the underwriting department, which involves assessing the likelihood and potential cost of a loss. Arranging the launch of a new policy product is a responsibility that typically lies with the product development, marketing, or business development departments, involving market research, product design, and promotional strategies. Therefore, (iii) and (iv) are the tasks least likely to be handled by the Accounts department.

This question tests the understanding of the fundamental principles of risk management and insurance, specifically the concept of ‘insurable risk’. An insurable risk must possess certain characteristics to be accepted by an insurer. These typically include being definite and measurable, accidental, not catastrophic, and having a large exposure base. The scenario describes a situation where a company is considering insuring against a potential loss due to a new product launch. The key factor is whether the potential loss is calculable and not so widespread that it would bankrupt the insurer. Option (a) correctly identifies that the risk must be calculable and not so widespread as to be unmanageable by the insurer. Option (b) is incorrect because while the loss must be accidental, the primary concern for insurability is its calculability and the insurer’s capacity to absorb it, not just the intent of the insured. Option (c) is incorrect as the ‘insurable interest’ is a separate concept that requires the policyholder to suffer a financial loss if the insured event occurs; it’s a prerequisite for a valid policy, not a characteristic of the risk itself. Option (d) is incorrect because while the loss should not be catastrophic for the insurer, the primary characteristic is the ability to estimate the probability and severity of the loss, which is captured by ‘calculable’ and ‘not too widespread’.

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, disclosing the relevant acts. This defence is specifically tied to the act of reporting suspicious property or financial activities related to terrorism, not to general compliance with AML/CFT guidelines or internal policies. Therefore, while having robust internal policies is crucial for overall compliance, it does not directly grant a statutory defence under UNATMO for specific acts of providing or collecting property for terrorist purposes; that defence is contingent on reporting to the JFIU.

The question tests the understanding of the definition of a ‘composite insurer’ as per Hong Kong insurance regulations. A composite insurer is defined as an insurer that transacts both long-term and general insurance business. Option B is incorrect because it limits the scope to only one type of business. Option C is incorrect as it refers to an insurer that only handles claims, not the underwriting of different business types. Option D is incorrect because it describes an insurer that exclusively deals with reinsurance, which is a distinct category.

The scenario highlights a situation where a customer is dissatisfied with a policy amendment process, which falls directly under the purview of customer servicing. While marketing and public relations are important for a company’s image, and sales enhancement programs aim to boost business, the core issue presented is a client’s negative experience with a service request. Therefore, addressing this complaint and ensuring a fair and prompt resolution is a primary responsibility of the customer servicing department, as outlined in the syllabus regarding handling client inquiries and complaints.

The Insurance Complaints Committee (ICCB) Panel’s powers are guided by its Articles of Association. These articles stipulate that the Panel must consider the policy terms, general principles of good insurance practice, applicable laws, and judicial precedents. Additionally, it must adhere to codes and guidelines from the Hong Kong Federation of Insurers (HKFI) or the Bureau. Crucially, while policy terms generally prevail, the Panel can override them if they lead to an unfair or unreasonable outcome for the complainant. This highlights the Panel’s authority to look beyond a literal interpretation of policy wording to ensure fairness, a key aspect of its function in resolving insurance disputes.

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. Other intervention powers include restrictions on investments, limitations on new business, requiring custody of assets by a trustee, conducting special actuarial investigations, appointing a manager to assume control, or initiating winding-up proceedings.

This question tests the understanding of the role of an accountant within an insurance company, specifically focusing on the critical function of managing company assets. While record-keeping, collections, and payments are all vital accounting functions, the prompt highlights the accountant’s responsibility for the care and placement of company assets, emphasizing security, return, and liquidity. This directly relates to the investment function, which is crucial for the insurer’s financial health and ability to meet its obligations.

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 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$5 million is not a specified minimum capital requirement in the provided context.

The question tests the understanding of the definition of a ‘composite insurer’ as per Hong Kong insurance regulations. A composite insurer is defined as an insurer that transacts both long-term and general insurance business. Option B is incorrect because it limits the scope to only one type of business. Option C is incorrect as it refers to an insurer that only handles claims, not the underwriting of different business types. Option D is incorrect because it describes an insurer that exclusively deals with reinsurance, which is a specialized area and not the definition of a composite insurer.

The Unilateral Organised Measures Against Terrorism Ordinance (UNATMO) empowers the Secretary for Security to freeze assets suspected of being linked to terrorism. A key provision of this ordinance is the prohibition against dealing with frozen property without explicit authorization. The ordinance also outlines specific offences related to making property or financial services available to terrorists or their associates, or soliciting funds for them. Contravention of the prohibition on dealing with frozen property can lead to a maximum of 7 years imprisonment and an unspecified fine. However, making property or financial services available to terrorists or collecting funds for them carries a more severe penalty of up to 14 years imprisonment and an unspecified fine. Therefore, providing financial services to a designated terrorist, even if it’s to facilitate a transaction that might seem beneficial, is a serious offence under the UNATMO.

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 may be higher than the market value at the time of the loss, again exceeding strict indemnity. Reinstatement insurance allows the insured to replace the lost or damaged item with a new one of similar kind and quality, which can also result in a payout exceeding the depreciated value. The condition of average, however, is a condition that applies when the sum insured is less than the value of the property. It ensures that the payout is proportionate to the sum insured, preventing over-indemnification, and therefore does not lead to more than indemnity being payable.

The United Nations (Anti-Terrorism Measures) Ordinance (UNATMO) empowers the Secretary for Security to freeze assets suspected of being linked to terrorism. It also prohibits dealing with such frozen property unless a license is obtained. The ordinance specifies penalties for contraventions, including imprisonment and fines. The question tests the understanding of the primary legal instrument in Hong Kong for implementing UN Security Council sanctions related to terrorism and the powers it grants to the Secretary for Security. Option B is incorrect as it refers to a different ordinance. Option C is incorrect because while the SFC regulates financial institutions, the UNATMO grants powers to the Secretary for Security for freezing terrorist property. Option D is incorrect as it describes a general reporting obligation rather than the specific power to freeze assets under the UNATMO.

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 (added to the sum assured), or by reducing future premiums. Therefore, bonuses are the direct manifestation of profit sharing in participating policies.

The Conduct of Insurance Agents for General Insurance Business and Restricted Scope Travel Business mandates specific professional behaviours. Agents are required to identify themselves before engaging in business discussions to ensure transparency and build trust. They must also provide advice only within their areas of expertise and competence, preventing misrepresentation or unsuitable recommendations. Furthermore, a crucial aspect of their duty is to clearly explain policy coverage and ensure the client comprehends the terms and benefits of the insurance product they are purchasing. This includes clarifying policy differences when comparisons are made, ensuring the client makes an informed decision. Therefore, all four listed points are essential components of an agent’s conduct.

The Insurance Authority (IA) mandates that travel insurance agents, their responsible officers, and technical representatives 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 obligation can lead to consequences such as the revocation of registration for a specified period, with additional requirements for re-registration, and more severe penalties for false declarations or non-response to requests for proof of compliance.

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.

When a Hong Kong-incorporated Financial Institution (FI) operates overseas and its foreign branch or subsidiary cannot adhere to Customer Due Diligence (CDD) and record-keeping requirements that are similar to Hong Kong’s Schedule 2, Parts 2 and 3, due to local legal prohibitions, the FI has specific obligations. Firstly, it must formally notify its relevant regulatory authority (RA) in Hong Kong about this inability to comply. Secondly, and crucially, the FI must implement additional measures to effectively manage and reduce the Anti-Money Laundering and Counter-Terrorist Financing (AML/CFT) risks that arise precisely because of this non-compliance with the equivalent Hong Kong standards. This ensures that the overall risk exposure is appropriately mitigated, even when direct adherence to Hong Kong’s specific rules is not feasible.