Paper 3 Long Term Insurance Quiz 74

This question tests the understanding of the principle of indemnity in insurance contracts, specifically as it applies to life insurance. The principle of indemnity aims to restore the insured to the financial position they were in before the loss occurred. In life insurance, the value of a human life is not easily quantifiable in monetary terms, and the payout is a pre-agreed sum rather than an attempt to compensate for a specific financial loss. Therefore, life insurance is generally considered a ‘benefit’ policy, not an indemnity policy. Statement (iii) correctly asserts that life insurance contracts are not normally subject to indemnity, and statement (iv) reinforces this by stating that indemnity does not typically apply to life insurance where benefit policies are common. Options (i) and (ii) are incorrect because they either equate benefit policies with indemnity policies or suggest indemnity applies to most life policies, which contradicts the fundamental nature of life insurance.

The core principle differentiating life insurance and annuities lies in their fundamental risk assumptions. Life insurance is designed to provide a payout upon the occurrence of an event (death), with premiums generally increasing with age due to the higher probability of mortality. Conversely, annuities are structured to provide income during a period of survival, meaning the payout increases with age at commencement because the insurer anticipates a longer payout period. This is directly related to the underwriting philosophy of each product, with life insurance focusing on the chance of dying and annuities on the chance of living.

When an insurance office identifies potential twisting, the Code of Conduct mandates a structured response. A crucial initial step, as outlined in the regulations, is to acknowledge the client’s complaint and provide a timeline for the investigation. Specifically, the selling office must inform the client within 30 days of receiving the complaint about the findings and any proposed resolutions. This communication is vital for maintaining transparency and managing client expectations during the investigation process. Options B, C, and D describe actions that may occur later in the process or are not the immediate required response upon receiving a complaint.

The calculation of life insurance premiums is a complex process that considers several key factors to ensure the insurer can meet its future obligations. Mortality refers to the probability of death at various ages, which is a fundamental component in determining the cost of life insurance. Interest is also crucial, as premiums collected are invested, and the expected returns help offset the cost of claims. Expenses, including acquisition costs, administrative overhead, and commissions, are factored into the premium to cover the operational costs of the insurer. Morbidity, on the other hand, relates to the incidence of sickness or disability, which is primarily a concern for health insurance and critical illness policies, not standard life insurance premiums.

This question tests the understanding of how the Insurance Companies Ordinance (Cap. 41) regulates the business of insurance in Hong Kong, specifically concerning the licensing and authorization requirements for entities conducting insurance business. The ordinance mandates that any person carrying on insurance business in Hong Kong must be authorized by the Insurance Authority. This authorization process ensures that insurers meet stringent financial, managerial, and operational standards, thereby protecting policyholders and maintaining the stability of the insurance market. Options B, C, and D describe activities or entities that are either regulated under different ordinances or are not directly related to the primary licensing requirement for conducting insurance business in Hong Kong.

The question tests the understanding of how premium waiver (WP) riders handle premium payments during a disability period, specifically when the disability ends before the next premium is due. The scenario describes a policyholder who has a monthly premium payment mode and a WP rider. The rider waives premiums during total disability. The policyholder recovers after 25 days of disability, which falls within the period for which the current monthly premium was waived. The key point is that the waiver is tied to the period of disability. Once the disability ceases, the obligation to pay premiums resumes from the next due date. Since the policyholder recovered 25 days into the waiver period, the next premium payment would be due in the following month, as the waiver only covered the period of actual disability. The rider does not extend the waiver beyond the recovery period or automatically adjust future premium payments based on partial waiver periods. Therefore, the policyholder would resume premium payments in the following month.

This question tests the understanding of the regulatory framework governing insurance intermediaries in Hong Kong, specifically focusing on the licensing requirements under the Insurance Companies Ordinance (Cap. 41). The Insurance Authority (IA) is the statutory body responsible for regulating the insurance industry, including the licensing and conduct of insurance intermediaries. An individual must be licensed by the IA to conduct regulated activities, such as advising on or arranging insurance contracts. The Hong Kong Federation of Insurers (HKFI) is a self-regulatory organization for insurers, not a licensing authority for intermediaries. The Hong Kong Confederation of Insurance Brokers (HKCIB) is a professional body for insurance brokers, but the ultimate licensing authority is the IA. The Mandatory Provident Fund Schemes Authority (MPFA) regulates the Mandatory Provident Fund (MPF) system, which is distinct from general insurance business.

The Guidance Note on Conducting “Know Your Client” Procedures for Long Term Insurance Business (CIB-GN(4)) emphasizes the importance of understanding the client’s financial situation and the purpose of the insurance policy. This includes assessing the client’s ability to afford the premiums over the policy’s duration and ensuring the policy aligns with their stated financial objectives and risk tolerance. Option A correctly identifies that the insurer must verify the client’s capacity to sustain premium payments and that the policy serves a genuine financial need, which are core KYC principles in this context. Option B is incorrect because while understanding the client’s investment experience is relevant for some products, it’s not the primary focus for all long-term insurance business KYC. Option C is incorrect as the insurer’s profit margin is an internal business consideration and not a direct KYC requirement for assessing the client. Option D is incorrect because while identifying beneficiaries is part of the policy process, it’s not the primary driver for the “Know Your Client” procedures related to the policy’s suitability and affordability.

The question tests the understanding of the conditions under which a Critical Illness (CI) benefit can be paid. According to the syllabus, a CI benefit is payable when the insured is diagnosed with a specified disease, a terminal illness with a life expectancy of 12 months or less, or requires a specified medical procedure. Option A correctly identifies the diagnosis of a specified disease as a trigger for the CI benefit. Option B is incorrect because while a terminal illness is a trigger, the specified life expectancy of 12 months or less is a crucial condition that is omitted. Option C is incorrect because undergoing a specified medical procedure is a trigger, but the scenario describes a diagnosis, not a procedure. Option D is incorrect as the syllabus mentions that CI cover is typically only available to standard risks, but this is a restriction on eligibility, not a condition for benefit payment upon diagnosis.

This question tests the understanding of how the Insurance Companies Ordinance (Cap. 41) governs the licensing and operations of insurance companies in Hong Kong. Specifically, it focuses on the requirement for an insurer to hold a valid license issued by the Insurance Authority (IA) to conduct insurance business. The scenario describes an entity soliciting insurance business without this crucial authorization, which is a direct contravention of the Ordinance. Option B is incorrect because while intermediaries are regulated, the primary issue here is the unlicensed insurer itself. Option C is incorrect as the IA’s role is regulatory, not advisory in this context, and the act described is illegal. Option D is incorrect because while solvency is a key regulatory concern, the fundamental violation is operating without a license, regardless of financial standing.

The Guidance Note on Conducting “Know Your Client” Procedures for Long Term Insurance Business (CIB-GN(4)) emphasizes the importance of understanding the client’s financial situation and the purpose of the insurance policy. This includes assessing the client’s ability to afford the premiums over the policy’s duration and ensuring the policy aligns with their stated financial objectives and risk tolerance. Option A correctly identifies the need to verify the client’s financial capacity and the policy’s suitability, which are core KYC principles in this context. Option B is incorrect because while understanding the client’s background is part of KYC, it’s the financial aspect and policy suitability that are paramount for long-term insurance. Option C is incorrect as the primary focus is on the client’s financial capacity and policy alignment, not solely on the insurer’s administrative efficiency. Option D is incorrect because while identifying potential conflicts of interest is important, it’s a secondary consideration to understanding the client’s financial standing and the policy’s appropriateness for their needs.

Guideline (G) L16 mandates that insurers provide policyholders with updated benefit illustrations at least annually. These illustrations must reflect the current conditions and future outlook. The purpose is to ensure policyholders have accurate, up-to-date information regarding their participating policies, especially concerning non-guaranteed elements like dividends and their impact on future premiums or benefits. While insurers may highlight changes in policy dividends, the core requirement is the refreshed illustration.

This question tests the understanding of the regulatory framework governing insurance intermediaries in Hong Kong, specifically focusing on the licensing requirements under the Insurance Companies Ordinance (Cap. 41). The Insurance Authority (IA) is the statutory body responsible for regulating the insurance industry, including the licensing and conduct of insurance intermediaries. An individual must be licensed by the IA to solicit or transact insurance business. The question presents a scenario where an individual is acting as a referral agent for an insurance company without holding a license. This action constitutes a breach of the regulatory requirements, as only licensed individuals are permitted to engage in such activities. The other options are incorrect because while an insurance company must be authorized, the focus of the question is on the intermediary’s actions. Furthermore, while professional bodies may have their own codes of conduct, the primary legal requirement for soliciting insurance business stems from the IA’s licensing regime.

The Illustration Document for Investment-Linked Policies (ILPs) is a crucial disclosure document mandated by the Securities and Futures Commission (SFC) to provide prospective policyholders with a clear and comprehensive understanding of the policy’s features, benefits, and risks. It is designed to facilitate informed decision-making by outlining projected investment returns, charges, and the potential impact of various scenarios on the policy’s value. The document serves as a vital tool for ensuring transparency and consumer protection in the sale of ILPs, aligning with the regulatory framework governing financial advisory services in Hong Kong.

When an insurance office identifies potential twisting, the Code of Conduct mandates a structured approach to address the situation and protect the policyholder. A crucial first step is to acknowledge the complaint and inform the client about the investigation’s timeline. Specifically, the selling office must notify the client within 30 days of receiving the complaint about the findings and any proposed resolutions. This communication ensures transparency and manages client expectations during the resolution process. Options B, C, and D describe actions that occur *after* the initial acknowledgment and investigation, or are related to different stages of the process, such as reporting to regulatory bodies or suspending agents, which are subsequent steps once twisting is confirmed.

This question tests the understanding of the regulatory framework governing insurance intermediaries in Hong Kong, specifically focusing on the licensing requirements under the Insurance Companies Ordinance (Cap. 41). The Insurance Authority (IA) is the statutory body responsible for regulating the insurance industry, including the licensing and supervision of insurance agents and brokers. An individual must be licensed by the IA to lawfully solicit or transact insurance business in Hong Kong. Failing to obtain the necessary license constitutes a breach of the relevant legislation, leading to potential penalties. The other options represent incorrect regulatory bodies or incorrect legal frameworks that do not directly govern the licensing of insurance intermediaries.

This question tests the understanding of the regulatory framework governing insurance intermediaries in Hong Kong, specifically focusing on the licensing requirements under the Insurance Companies Ordinance (Cap. 41). The Insurance Authority (IA) is the statutory body responsible for regulating the insurance industry, including the licensing and supervision of insurance agents and brokers. An individual must be licensed by the IA to lawfully solicit or transact insurance business in Hong Kong. The question presents a scenario where an individual is acting as an intermediary without the necessary authorization, which constitutes a breach of the relevant legislation. The other options represent incorrect interpretations of regulatory responsibilities or licensing procedures. For instance, the Hong Kong Monetary Authority (HKMA) regulates banks, not insurance intermediaries directly, although there can be overlap in financial services. The Mandatory Provident Fund Schemes Authority (MPFSA) regulates occupational retirement schemes, and while some insurance products may be linked to MPF, the primary licensing for insurance intermediaries falls under the IA. The Securities and Futures Commission (SFC) regulates the securities and futures markets, and while some investment-linked insurance products fall under its purview, the general licensing of insurance intermediaries is the IA’s responsibility.

Guideline (G) L16 mandates that insurers provide policyholders with updated benefit illustrations at least annually. These illustrations must reflect the current conditions and future outlook. This ensures that policyholders have a realistic understanding of their policy’s performance, especially concerning non-guaranteed elements like dividends and investment returns, which can fluctuate. The guideline aims to promote transparency and informed decision-making by policyholders regarding their long-term insurance products.

This question tests the understanding of the regulatory framework governing insurance intermediaries in Hong Kong, specifically focusing on the licensing requirements under the Insurance Companies Ordinance (Cap. 41). The Insurance Authority (IA) is the statutory body responsible for regulating the insurance industry, including the licensing and supervision of insurance agents and brokers. An individual acting as an intermediary for insurance business must be licensed by the IA. The question presents a scenario where an individual is facilitating insurance contracts without this necessary authorization, which constitutes a breach of the regulatory requirements. The other options represent incorrect interpretations of the regulatory landscape. Option B is incorrect because while the Hong Kong Monetary Authority (HKMA) regulates banks, the licensing of insurance intermediaries falls under the IA. Option C is incorrect as the Securities and Futures Commission (SFC) regulates the securities and futures markets, not insurance intermediaries. Option D is incorrect because while professional indemnity insurance is a requirement for licensed intermediaries, it does not exempt them from the fundamental licensing obligation.

Unit-linked policies derive their value from underlying investment funds. The policyholder bears the investment risk, meaning the policy’s value fluctuates with the performance of these funds. While insurers manage the funds, the ultimate value is tied to market movements, not guaranteed by the insurer beyond any specific riders. Therefore, the policy value is directly influenced by the performance of the chosen investment assets.

Participating (PAR) life insurance policies are designed to share in the insurer’s divisible surplus, if any. This potential to receive dividends means that the insurer typically charges a higher premium for these policies compared to non-participating (NON-PAR) policies, which do not offer such a share. The higher premium for PAR policies accounts for the possibility of future dividend payments, even though these are not guaranteed. Term insurance, by its nature, is generally not structured to participate in surplus distributions, making it typically a NON-PAR product.

This question tests the understanding of the regulatory framework governing insurance intermediaries in Hong Kong, specifically focusing on the licensing requirements under the Insurance Companies Ordinance (Cap. 41). The Insurance Authority (IA) is the statutory body responsible for regulating the insurance industry. Any individual or entity acting as an insurance agent or broker must be licensed by the IA to conduct regulated activities. The question presents a scenario where an individual is soliciting insurance business without the necessary authorization, which constitutes a breach of the Ordinance. The correct answer highlights the requirement for a license from the IA, as stipulated by the relevant legislation.

The question tests the understanding of how companies can customize illustration documents according to regulatory guidelines. Section 5/23 (b) explicitly states that companies may exclude irrelevant information and include additional relevant information, provided it is not misleading and does not detract from the standard disclosures. Option (a) is incorrect because while companies can customize, they cannot omit information that is legally required to be presented. Option (c) is incorrect as the primary purpose of customization is to tailor the illustration to the specific product and customer, not to simplify it to the point of omitting crucial details. Option (d) is incorrect because while additional information can be included, it must be relevant and not misleading, which is a broader principle than simply adding marketing material.

A unit-linked long term insurance policy’s value is directly tied to the performance of the underlying investments. Premiums paid are used to purchase units in a fund, and the policy’s value fluctuates based on the unit price. This means the policyholder bears the investment risk. The question tests the understanding of how the value of a unit-linked policy is determined and the associated risk, differentiating it from traditional insurance products where the insurer bears more of the investment risk.

This question tests the understanding of the regulatory framework governing insurance intermediaries in Hong Kong, specifically focusing on the licensing requirements under the Insurance Companies Ordinance (Cap. 41). The Insurance Authority (IA) is the statutory body responsible for regulating the insurance industry, including the licensing and supervision of insurance agents and brokers. An individual must be licensed by the IA to solicit or transact insurance business. The question presents a scenario where an individual is acting as an intermediary without the necessary authorization, which constitutes a breach of the regulatory requirements. The other options describe activities that are either not directly related to intermediary licensing or are permissible under different circumstances. For instance, providing general information about insurance products without soliciting specific business might not require a license, but the scenario implies active engagement in soliciting business. The Hong Kong Federation of Insurers is a self-regulatory organization for insurers, not a licensing authority for intermediaries. The Mandatory Provident Fund Schemes Authority (MPFSA) regulates mandatory provident fund schemes, which is a separate regulatory domain.

The Standard Illustration for universal life (non-linked) policies is designed to provide a minimum summary of benefits. A key aspect of this illustration is that it refers exclusively to the Basic Plan, explicitly excluding any riders or additional benefits. This ensures clarity and focuses the prospective policyholder on the core product features. The scenario presented describes a situation where an illustration includes details about a rider, which deviates from the standard requirement of focusing solely on the basic plan. Therefore, this would be considered a deviation from the purpose of the Standard Illustration.

A unit-linked long term insurance policy’s value is directly tied to the performance of the underlying investments chosen by the policyholder. This means that the policy’s value will fluctuate in line with the market value of these investments. Therefore, if the investments perform poorly, the policy value will decrease, and if they perform well, the policy value will increase. This direct correlation is a defining characteristic of unit-linked products, distinguishing them from traditional insurance policies where the insurer bears the investment risk.

The core principle differentiating life insurance and annuities lies in their fundamental risk assumptions. Life insurance is designed to provide a benefit upon the occurrence of an event (death), with premiums generally increasing with age due to the higher probability of mortality. Conversely, annuities are structured to provide income for as long as the annuitant lives, meaning the benefit payments are larger for older individuals at the commencement of the annuity because the period of potential payout is shorter. This is directly related to the concept of longevity risk, which annuities aim to mitigate by pooling this risk across a group, whereas life insurance addresses mortality risk. The statement that annuities are based on the chances of living, while life insurance is based on the chances of dying, accurately captures this fundamental distinction.

This question tests the understanding of the regulatory framework governing insurance intermediaries in Hong Kong, specifically focusing on the licensing requirements under the Insurance Companies Ordinance (Cap. 41). The Insurance Authority (IA) is the statutory body responsible for regulating the insurance industry, including the licensing and supervision of insurance agents and brokers. An individual must be licensed by the IA to lawfully solicit or transact insurance business in Hong Kong. The scenario describes an individual acting as an intermediary without this necessary authorization, which constitutes a breach of the regulatory requirements. The other options represent incorrect interpretations of the regulatory landscape. Option B is incorrect because while the Hong Kong Federation of Insurers (HKFI) plays a role in industry self-regulation and consumer education, it is not the licensing authority. Option C is incorrect as the Mandatory Provident Fund Schemes Authority (MPFA) regulates the Mandatory Provident Fund (MPF) system, not general insurance intermediation. Option D is incorrect because while professional indemnity insurance is a requirement for licensed intermediaries, it does not substitute for the primary licensing requirement itself.

The Insurance Authority (IA) mandates the use of the Investor Protection Information Statement – Mainland Prospect (IFS-MP) for all new applications of long-term insurance policies for individual customers who are holders of a Hong Kong Resident Identity Card issued by the PRC. This requirement applies across all distribution channels and policy classes (A through F) as defined under ‘long term business’ in the Insurance Ordinance. Crucially, these customers cannot opt out of this requirement. The regulation also extends to situations involving changes in policy ownership or assignments, where the new policyholder or assignee, if they are PRC Resident Identity Card holders, must also complete the IFS-MP. This ensures that all relevant parties are adequately informed about the product’s risks and features.