Paper 2 General Insurance Quiz 03

This question tests the understanding of how changes in the insured risk can impact the policy. The Insurance Companies Ordinance (Cap. 41) and related common law principles dictate that if the circumstances under which a risk was insured alter for the worse, the insurer may have grounds to cancel the policy, provided the policy terms allow for it. This is because the original assessment of the risk, which formed the basis of the premium and terms, is no longer valid. Option B is incorrect because while a change in market competition might influence underwriting decisions, it doesn’t directly relate to a change in the insured’s risk circumstances. Option C is incorrect as the insurer’s marketing philosophy is an internal business consideration, not a direct response to a change in the insured’s risk. Option D is incorrect because while expert advice is used in risk assessment, it’s a tool for evaluation, not a consequence of a risk alteration that would necessitate policy cancellation.

The scenario describes a situation where an insured person sustained an injury and received a certain number of days of temporary total disability benefit and temporary partial disability benefit. The insured was dissatisfied, believing they should have received the higher temporary total disability benefit for the entire duration. The Complaints Panel’s decision was based on the nature and severity of the injury, the insured’s occupation (self-employed director with primarily office duties), and the absence of complications. The panel determined that after eight days, the insured’s condition only met the criteria for temporary partial disability, not temporary total disability, as defined by the policy. This aligns with the principle that personal accident policies often differentiate benefit amounts based on the degree of disablement, and the insurer’s offer was deemed appropriate given the policy’s definitions and the specific circumstances of the injury and recovery.

Moral hazard refers to the increased likelihood of a loss occurring because an individual is insured. This can manifest in various ways, including dishonesty, carelessness, unreasonableness, and negative social behaviour. While dishonesty leading to fraud is a direct form of moral hazard, carelessness, which increases the probability of accidents or losses due to a lack of diligence, is also a significant manifestation. Unreasonableness, characterized by inflexible or opinionated views that create problems, and negative social behaviour like vandalism, also contribute to increased risk exposure for the insurer. Therefore, all these behaviours, stemming from the ‘human element’ of the insured, are considered aspects of moral hazard.

The ‘step-back system’ for No Claim Discount (NCD) in private car insurance, as described in the IIQE syllabus, dictates how a discount is adjusted after a claim. For drivers with an entitlement of four or more claim-free years (equivalent to 50% or 60% NCD), a single claim in the policy year will result in a reduction of the NCD to 20% or 30% respectively upon renewal. This means the discount is not entirely lost but is significantly reduced, requiring subsequent claim-free years to rebuild to the previous level. The other options describe scenarios that would lead to a complete loss of NCD or are not directly related to the ‘step-back’ mechanism for higher NCD entitlements.

A combined liability policy, as described, integrates coverage for public liability, products liability, and employees’ compensation liability into a single document. While clients may request additional coverages like Directors’ and Officers’ Liability or Professional Liability, these are typically added extensions rather than inherent components of the basic combined liability structure. Property insurance and pecuniary insurance are distinct categories of insurance, focusing on physical assets and financial interests respectively, and are not typically bundled within a combined liability policy. A combined ‘umbrella’ type cover is a broader, often bespoke, arrangement that can encompass various risks, including property and pecuniary, but it is not synonymous with a combined liability policy.

This question tests the understanding of how travel insurance premiums are determined. While geographical area, duration, and the number of people insured are primary factors, the concept of an ‘annual policy’ is a specific pricing structure designed for frequent travelers. This structure offers a single premium for a defined period, typically a year, covering multiple trips within that timeframe, often at a more advantageous rate than purchasing individual policies for each trip. The other options represent components that influence premium calculation but are not the overarching pricing model for frequent travelers.

The Code of Conduct for Insurers, established by the Hong Kong Federation of Insurers (HKFI), specifically addresses the standards expected in the insurance industry concerning personal insurance policies for Hong Kong residents. It covers a broad spectrum of practices, including underwriting, claims handling, product knowledge, and customer rights. While the Insurance Companies Ordinance (ICO) sets out foundational regulatory requirements for insurers’ solvency and governance, and the Code of Practice for the Administration of Insurance Agents details intermediary conduct, the Code of Conduct for Insurers is the primary document that outlines the expected ethical and operational standards for insurers themselves in their dealings with policyholders, particularly in personal insurance.

The scenario describes a shop owner losing cash from her bag after closing her shop. The money insurance policy explicitly states that cover is for losses occurring ‘during normal business hours’ and ‘while being conveyed by messenger’. The loss occurred outside business hours, and while the cash was being conveyed, the timing violated a key condition of the policy. Therefore, the insurer is justified in rejecting the claim based on the policy’s temporal limitation.

This question tests the understanding of how travel insurance premiums are determined. While geographical area, duration, and the number of people insured are primary factors, the concept of an ‘annual policy’ is a specific pricing structure designed for frequent travelers. This structure offers a single premium for a defined period, typically a year, covering multiple trips. The other options represent individual trip factors or general policy features, not the specific pricing model for frequent travelers.

The question tests the understanding of an insurer’s obligation regarding policy renewals. According to general insurance principles and common practice, an insurer is not legally mandated to remind the policyholder about an approaching renewal date. If the policyholder fails to take action, the policy simply lapses at the end of its term. While it is often in the insurer’s interest to send reminders to retain business, this is a commercial practice, not a legal requirement. Therefore, the insurer is not obligated to remind the insured.

The question tests the understanding of the core components typically found in a company’s published declaration of customer service standards. These declarations are designed to outline the company’s commitment to its clients and stakeholders. Option (a) correctly identifies the key elements that such declarations usually encompass, reflecting a commitment to quality, professional standards, efficiency, ethical conduct, and fair claims handling. Options (b), (c), and (d) represent specific aspects that might be included but do not cover the full spectrum of typical declarations as comprehensively as option (a). For instance, while “disclosure requirements” (d) are crucial obligations, they are often presented as obligations of the policyholder or intermediary, rather than a primary promise from the insurer in their service declaration. Similarly, “claims commitments” (c) are a part of the overall service promise, but not the entirety. “Confidentiality and compliance” (b) is also a vital aspect but is a subset of broader professional standards and ethical conduct.

The scenario describes a situation where an insurer might impose specific conditions on a policy due to the nature of the risk. In this case, the insurer is concerned about the insured item’s value and the potential for loss if it’s not kept in a secure location. This is a common practice where underwriters, to manage specific, high-value risks, may apply tailored exclusions or conditions. The question tests the understanding of how insurers manage individual risks by modifying policy terms, which is a core underwriting principle. Option (a) accurately reflects this by stating that the insurer can exclude coverage unless the item is kept in a secure place, directly addressing the underwriter’s concern about the risk associated with the jewelry’s location. Option (b) is incorrect because while insurers do assess risk, they don’t typically offer a blanket exclusion for all items of high value without specific conditions. Option (c) is incorrect as the scenario doesn’t suggest a market-wide exclusion, but rather a specific condition for a particular policy. Option (d) is incorrect because while fraud is a general exclusion, the scenario focuses on risk management through specific policy conditions, not on preventing fraudulent activity.

The scenario describes a situation where an insured party, after experiencing a fire loss, fails to take reasonable steps to protect the damaged property from further deterioration, such as preventing water damage to electrical components. This directly violates the insured’s duty to minimize loss, which is a common law obligation and often explicitly stated in policy conditions. The insured’s inaction leads to an increase in the overall damage, which the insurer may seek to attribute to the insured’s breach of duty, potentially impacting the claim payout. Admitting liability to a third party or failing to disclose other insurances are separate duties, and while important, they are not the primary breach in this specific scenario. Subrogation rights are also a duty, but the failure to preserve property is a more immediate and direct breach of the duty to mitigate loss.

The question tests the understanding of specific exclusions in motor insurance for motorcycles. According to the provided text, theft claims for motorcycles are only admissible if the entire machine is stolen. This means that the loss of accessories alone, even if stolen from the motorcycle, is not covered under the standard ‘Own Damage/Accidental Damage’ section for theft. Therefore, a scenario where only accessories are stolen would not be covered.

The question tests the understanding of the pro rata average condition in insurance policies, specifically how under-insurance affects claim payouts. The scenario describes a situation where the sum insured for contents is HK$500,000, but the actual value at risk is HK$1,000,000, meaning the property is under-insured by 50%. The pro rata average condition stipulates that the claim payment will be reduced proportionally to the extent of under-insurance. Therefore, if the loss is HK$200,000, the payout will be 50% of this amount (HK$100,000), as the sum insured only represents 50% of the value at risk. This condition is a key mechanism to encourage policyholders to insure their property adequately.

This question tests the understanding of how changes in the insured risk can impact the policy. The Insurance Companies Ordinance (Cap. 41) and general insurance principles dictate that if the circumstances under which a risk was insured alter for the worse, the insurer may have grounds to cancel the policy. This is because the original assessment of the risk, and therefore the premium charged, may no longer be adequate. Option B is incorrect because while a change in market conditions might influence underwriting, it doesn’t directly grant the insurer the right to cancel based on a worsened risk. Option C is incorrect as the insurer’s marketing philosophy is a business strategy, not a basis for policy cancellation due to risk alteration. Option D is incorrect because while an underwriter might seek expert advice during the initial assessment, it doesn’t directly relate to the insurer’s right to cancel due to a subsequent worsening of the risk.

The scenario describes a shop owner whose wallet containing business cash went missing after closing hours while she was on her way home. The money insurance policy explicitly states that cover is for losses occurring during normal business hours while being conveyed by a messenger. Since the loss happened outside of business hours, it falls outside the defined scope of coverage for this specific policy. Therefore, the claim would be rejected based on the policy’s temporal limitation.

This question tests the understanding of how changes in the insured risk can impact the policy. The Insurance Companies Ordinance (Cap. 41) and related common law principles dictate that if the circumstances under which a risk was insured alter for the worse, the insurer may have grounds to cancel the policy, provided the policy terms allow for it and proper notice is given. This is because the original assessment of the risk, which formed the basis of the premium and terms, is no longer valid. Option B is incorrect because while a change in market competition might influence underwriting strategy, it doesn’t directly relate to a change in the insured’s risk circumstances. Option C is incorrect as the insurer’s marketing philosophy is an internal business decision and not a direct consequence of a change in the insured’s risk. Option D is incorrect because while expert advice is used in risk assessment, it’s a tool, not a consequence of a risk alteration that would automatically lead to policy cancellation.

The Employees’ Compensation Assistance Scheme (ECAS) is designed to provide a safety net when an employer’s compulsory employees’ compensation insurance is absent or ineffective. It is funded partly by a levy on insurance premiums. Therefore, if an employer fails to secure the mandatory insurance, the ECAS steps in to ensure employees receive compensation for work-related injuries or diseases, fulfilling the spirit of the compulsory insurance requirement.

This question tests the understanding of how an excess works in motor insurance, specifically the difference between a voluntary and a compulsory excess, and how they interact. A voluntary excess is chosen by the policyholder to reduce the premium, while a compulsory excess is imposed by the insurer. Standard policy excesses are a type of compulsory excess that applies universally or to specific risk factors without a premium discount. In this scenario, the policyholder chose a voluntary excess of HK$5,000. The insurer then imposed a compulsory underwriting excess of HK$2,000 due to the vehicle’s high performance. Standard policy excesses, by definition, are always in parallel with other excesses and do not qualify for premium discounts. Therefore, the total excess applicable to the claim would be the sum of the voluntary excess and the compulsory underwriting excess, which is HK$7,000. The explanation clarifies that standard policy excesses are a separate category of compulsory excess and would be applied in addition to the voluntary and underwriting excesses if they were also present, but in this case, only voluntary and underwriting excesses are mentioned as being applied.

The Insurance Claims Complaints Bureau (ICCB) is designed to handle disputes related to personal insurance claims. It has a jurisdictional limit of HK$800,000 for the value of the claim. Complaints exceeding this amount, or those arising from commercial, industrial, or third-party insurance, fall outside the ICCB’s purview and must be resolved through other means such as litigation or arbitration. Therefore, a dispute concerning a commercial property insurance claim for HK$1,500,000 would not be eligible for the ICCB’s services.

This question tests the understanding of the Insurance Claims Complaints Bureau (ICCB) in Hong Kong, a key dispute resolution mechanism for insurance policyholders. The ICCB scheme is designed to provide an accessible and cost-effective avenue for resolving complaints against insurers. It is crucial to understand the scope of its applicability, the fee structure for complainants, the appeal process, and the monetary limits for claims handled. Specifically, the ICCB scheme applies to a broad range of insurance claims, not just personal lines, and complainants are not charged fees. While insurers can appeal an award, the insured cannot. The maximum claim amount handled by the ICCB is HK$800,000. Therefore, only statements (ii) and (iv) are accurate.

This question tests the understanding of the distinction between ‘Specified Perils’ and ‘All Risks’ cover in property insurance, as outlined in the IIQE syllabus. ‘Specified Perils’ cover only losses caused by events explicitly listed in the policy, requiring the claimant to prove the cause of loss. ‘All Risks’ cover, conversely, covers all accidental losses unless specifically excluded, shifting the burden of proof to the insurer to demonstrate an exclusion applies. The scenario describes a situation where a loss occurred, and the claimant is unable to identify the exact cause. Under a ‘Specified Perils’ policy, this would likely result in a denied claim because the claimant cannot prove the loss was caused by a named peril. However, under an ‘All Risks’ policy, the claimant only needs to demonstrate that an accidental loss occurred, and the insurer would then need to prove an exclusion applies. Therefore, the ‘All Risks’ policy is more advantageous in this specific scenario for the claimant.

The question tests the understanding of the scope of theft insurance, specifically concerning damage to the premises during an attempted theft. According to the provided text, theft policies typically include coverage for damage caused by thieves to the insured premises when making forcible and violent entry or exit. This damage is not subject to a separate sum insured but is covered under the general policy for stock and specified contents. Therefore, a scenario where a thief damages a shop’s door to gain entry and subsequently steals goods would be covered for both the stolen goods and the damage to the door, provided the entry was forcible and violent.

An insurance broker acts as an agent for the proposer, meaning they are legally identified with the proposer. This agency relationship imposes a duty of utmost good faith. If a broker withholds or misrepresents material facts, this breach of good faith is imputed to the proposer, potentially voiding the policy. Therefore, the broker’s actions in disclosing or failing to disclose material information directly impact the validity of the insurance contract from the proposer’s perspective.

The scenario describes a situation where an insurer has consistently accepted late premium payments without objection. This pattern of behavior, if relied upon by the insured, can lead to the insurer being prevented from strictly enforcing the contractual due date for future payments. This principle is known as waiver, where the insurer, through its conduct, relinquishes its right to insist on punctuality. For the doctrine of estoppel to apply, the insured must demonstrate that they reasonably acted based on this established practice, believing that late payments would continue to be accepted. Therefore, the insurer’s past acceptance of late payments without protest is the core element that could lead to a waiver of the strict contractual requirement for timely premium submission.

The core issue here revolves around the interpretation of the ‘as soon as reasonably possible’ notification clause. While the insured reported the claim within 20 days, the insurer argued this was too late because the repair had already been completed, hindering their ability to investigate. The Complaints Panel, however, found the 20-day period to be reasonable for a layman, especially given the simple nature of the damage and the availability of repair documentation. The panel’s remark that there wasn’t a ‘condition precedent’ to liability for reporting *before* repairs suggests that the timing of the notification, while important, wasn’t an absolute bar to the claim if the insurer wasn’t unduly prejudiced. The insurer’s inability to investigate due to the repair was acknowledged as prejudicial, but the panel ultimately gave the insured the benefit of the doubt due to the promptness of the claim after the event and the lack of evidence of a poor claims history. This indicates that the panel weighed the prejudice against the insured’s actions and the overall circumstances.

The scenario describes a situation where an insurer is determining the premium for a motor insurance policy. The question asks about the factors influencing this premium calculation. ‘Rating Features’ are precisely those elements used by insurers to calculate premiums, and in motor insurance, these commonly include the scope of coverage, the vehicle’s engine capacity, its intended use, and its value. Options B, C, and D describe related but distinct concepts: ‘Risk Classification’ groups similar risks, ‘Risk Discrimination’ differentiates within those groups, and ‘Public Policy’ relates to legal principles that prevent certain agreements, not premium calculation factors.

This question assesses the understanding of the multifaceted impact of poor customer service on an insurance company’s operations and reputation. The “take it or leave it” approach, while seemingly a direct cost-saving measure, leads to a cascade of negative consequences. Loss of business is a direct result of customers seeking better service elsewhere. Insurance intermediaries, crucial for business generation, will withdraw their support if they cannot rely on the insurer’s service quality, impacting their own productivity and willingness to promote the insurer. Furthermore, a reputation for poor service erodes market prestige, making it harder to attract both customers and intermediaries, and can even invite regulatory scrutiny from the government, which aims to protect consumers and maintain Hong Kong’s standing as a financial hub. Therefore, all these factors are significant negative outcomes of neglecting customer service.

The core principle of an indemnity policy is to restore the insured to their pre-loss financial position. When new parts are used to repair an older vehicle, these new parts inherently offer a superior lifespan and condition compared to the original, worn-out parts. This improvement in the vehicle’s condition beyond its pre-accident state is termed ‘betterment’. The insurer is entitled to recover a portion of the cost of the new parts to account for this betterment, preventing the insured from being in a financially superior position after the repair. The scenario states the insurer applied a 35% betterment contribution, which was deemed reasonable given the vehicle’s age and mileage, and importantly, the policy exclusions did not cover depreciation, making the betterment contribution a valid claim by the insurer to offset the enhanced value provided by the new parts.