Paper 3 Long Term Insurance Quiz 77

The level premium system, as described, involves charging a premium that remains constant throughout the policy’s term. In the early years, this premium is higher than the actual cost of insurance for that year. This excess premium, along with the interest earned on it, accumulates to form a reserve. This reserve is then used to offset the shortfall in premiums during the later years of the policy, when the cost of insurance naturally increases with age. This mechanism allows for a stable, predictable premium for the policyholder while ensuring the insurer can meet its long-term obligations. The natural premium system, in contrast, charges premiums that increase annually with the insured’s age, which becomes prohibitively expensive for older policyholders and leads to adverse selection.

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 to solicit or arrange insurance business must be licensed by the IA. The question presents a scenario where an individual is facilitating insurance transactions without this necessary authorization, which constitutes a breach of the regulatory requirements. The other options represent entities or activities that are either not directly related to intermediary licensing or are permissible under different regulatory contexts. For instance, a company providing actuarial services does not require an intermediary license, and a policyholder simply purchasing insurance for themselves is not acting as an intermediary.

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 regulatory requirements, leading to potential penalties and invalidation of any business conducted.

The Insurance Authority’s Guideline on Underwriting Long Term Insurance Business (G L16) mandates that the board of directors is ultimately responsible for interpreting policyholders’ reasonable expectations and deciding on dividend declarations. This decision must consider the principle of fair treatment of customers and the equity between shareholders and policyholders. While the appointed actuary provides recommendations and reports, the final decision-making authority rests with the board. The guideline also emphasizes the need for a corporate policy on surplus allocation and dividend declarations, approved by the board and available to the IA.

The scenario highlights a situation where a policyholder is seeking a refund outside the stipulated cooling-off period. According to the provided guidelines, insurance intermediaries (LIMs) are required to maintain records of complaints or disputes where clients are refused refunds after the cooling-off period has expired. These records must be made available to the Hong Kong Federation of Insurers (HKFI) upon request. Therefore, the intermediary’s responsibility is to retain and be prepared to submit these specific records.

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 the need for a specified medical procedure is a trigger, but the scenario describes a diagnosis of a condition, not a procedure. Option D is incorrect because while a waiting period might apply, the core trigger for the benefit is the diagnosis of a specified illness, not the completion of a waiting period.

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 lawfully solicit or transact insurance business in Hong Kong. The scenario describes an individual acting as a broker without this necessary authorization, which constitutes a breach of the regulatory requirements. The other options represent incorrect interpretations of the regulatory landscape: the Hong Kong Monetary Authority (HKMA) regulates banks and other financial institutions, not insurance intermediaries directly; the Securities and Futures Commission (SFC) regulates the securities and futures markets; and while professional bodies may have their own codes of conduct, the fundamental legal requirement for transacting insurance business is the IA’s license.

This question assesses 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 intermediaries. An individual must be licensed by the IA to conduct regulated activities, such as advising on or arranging insurance contracts. The question highlights a scenario where an individual is acting without the necessary authorization, which constitutes a breach of the regulatory requirements. The correct answer emphasizes the need for proper licensing to engage in such activities, aligning with the principles of consumer protection and market integrity mandated by the IA.

A Disability Waiver of Premium (WP) rider is designed to relieve the policyowner-insured from the obligation to pay premiums during a period of total disability. The core principle is that the policy remains in force, maintaining its cash value accumulation and dividend-paying status, as if premiums were still being paid. This rider does not suspend the policy; rather, it ensures its continuity by waiving future premium payments while the insured is disabled. The definition of ‘total disability’ is crucial and can vary, often encompassing the inability to perform one’s own occupation or any occupation for which the insured is suited by education, training, or experience, or a specific loss of limbs or sight. The scenario provided illustrates a situation where the insurer declined a claim because the insured, while unable to perform their specific role as a fireman, was still considered capable of engaging in other gainful occupations, aligning with a more restrictive definition of total disability. Therefore, the rider’s primary function is to maintain the policy’s active status without requiring premium payments from the disabled policyowner-insured.

The scenario describes a situation where an insured failed to disclose symptoms that were later diagnosed as nasopharyngeal carcinoma. The insurer attempted to repudiate the claim based on material non-disclosure. However, the Complaints Panel ruled in favour of the claimant. One of the key reasons for this ruling was the application of the incontestability provision. This provision, typically effective after a specified period (in this case, two years), prevents an insurer from voiding a policy due to misrepresentation or non-disclosure, unless fraud can be proven. Since the policyholder died more than two years after the policy came into force and no evidence of fraud was presented, the incontestability provision shielded the policy from being voided on the grounds of non-disclosure. The question tests the understanding of how the incontestability provision operates as a defence against claims of breach of utmost good faith, particularly when fraud is not involved.

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), meaning the insurer benefits from a shorter lifespan of the insured. Conversely, annuities are structured to provide income for the annuitant’s lifetime, meaning the insurer benefits from the annuitant living longer. This directly impacts underwriting: life insurance premiums increase with age because the probability of death rises, while annuity payments increase with age at commencement because the period over which payments are made is shorter, requiring larger individual payments to meet the lifetime obligation. Similarly, men typically receive higher annuity payments than women of the same age because, statistically, women tend to live longer, meaning the annuity payout period for women is expected to be longer, thus reducing the per-payment amount.

This question tests the understanding of the implications of non-payment of premiums within the grace period for a life insurance policy. Option (a) correctly states that if the insured dies during the grace period before the premium is paid, the outstanding premium will be deducted from the death benefit. This is a crucial aspect of how grace periods function, ensuring the insurer is not liable for the full sum assured without receiving the due premium. Option (b) is incorrect because while the initial premium might have different terms, the grace period generally applies to subsequent premiums. Option (c) is incorrect as payment within the grace period is considered timely for the purpose of keeping the policy in force, but it doesn’t retroactively make the premium paid ‘on time’ in the sense of the original due date for all purposes. Option (d) is incorrect because the scenario described in (i) is a deduction, not free insurance; free insurance, as described in (ii) for U.S. style policies, refers to the policy remaining in force for a period after the grace period ends without payment, which is a different concept.

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. The question presents a scenario where an individual is providing advice on insurance products without holding the necessary authorization. This directly contravenes the provisions of the Ordinance which mandate that any person who solicits or accepts insurance business must be licensed by the IA. The other options represent incorrect interpretations of regulatory responsibilities or licensing categories. Option B is incorrect because while the Hong Kong Monetary Authority (HKMA) regulates banks, the IA is the sole regulator for insurance intermediaries. Option C is incorrect as the Mandatory Provident Fund Schemes Authority (MPFSA) regulates MPF schemes, not general insurance advice. Option D is incorrect because while professional bodies may have their own codes of conduct, the primary legal requirement for conducting insurance business stems from the IA’s licensing regime.

The scenario describes a situation where a policyholder failed to disclose symptoms that were later diagnosed as nasopharyngeal carcinoma. The insurer attempted to repudiate the claim based on material non-disclosure. However, the Complaints Panel ruled in favour of the claimant. One of the key reasons for this ruling was the application of the incontestability provision. This provision, typically effective after a certain period (in this case, more than two years), prevents an insurer from voiding a policy due to misrepresentation or non-disclosure, unless fraud can be proven. Since the policyholder died more than two years after the policy came into force and no evidence of fraud was presented, the incontestability provision shielded the policy from being voided on the grounds of non-disclosure. The question tests the understanding of how the incontestability provision operates as a defence against claims of breach of utmost good faith, particularly when fraud is not involved.

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 intermediaries. 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 a referral agent for an insurance company without holding a license. This action constitutes a breach of the regulatory requirements, as only licensed individuals or entities are permitted to engage in such activities. The other options represent incorrect interpretations of the regulatory landscape. Option B is incorrect because while the company itself is licensed, the individual acting on its behalf must also be licensed. Option C is incorrect as the Insurance Companies Ordinance mandates licensing for intermediaries, not just for those who directly receive commission. Option D is incorrect because while professional indemnity insurance is a requirement for licensed intermediaries, it does not exempt an unlicensed individual from the primary licensing obligation.

This scenario describes an applicant who has disclosed a history of a serious medical condition, which is a common reason for an underwriter to request further medical information. The applicant’s age (55) also falls into the category where insurers might seek more detailed medical reports. While the sum assured is substantial, the primary driver for requesting an Attending Physician’s Statement (APS) in this context is the specific medical disclosure that requires further investigation, as per standard underwriting practices outlined in the syllabus. An APS is the most frequent type of medical report requested when specific medical disclosures need clarification or when the applicant is at an advanced age.

The Customer Protection Declaration Form, as outlined by the Hong Kong Federation of Insurers (HKFI), serves as a crucial document to ensure transparency and informed consent. It requires the intermediary to declare that they have provided the customer with a clear and understandable explanation of the product’s features, benefits, risks, and charges. This includes confirming that the customer has been given sufficient opportunity to ask questions and that their queries have been addressed satisfactorily. The intermediary must also confirm that the customer understands the nature of the product and its suitability for their needs. The declaration is a key component of the intermediary’s duty of care and adherence to regulatory requirements aimed at protecting consumers in the insurance market.

This question tests the understanding of calculating the probability of winning the jackpot in a 6/49 lottery. The total number of ways to choose 6 numbers from 49 is given by the combination formula C(n, k) = n! / (k! * (n-k)!). In this case, n=49 and k=6. The calculation is C(49, 6) = 49! / (6! * (49-6)!) = 49! / (6! * 43!) = (49 * 48 * 47 * 46 * 45 * 44) / (6 * 5 * 4 * 3 * 2 * 1) = 13,983,816. Since there is only one winning combination for the jackpot, the probability of winning is 1 divided by the total number of combinations. Therefore, the probability is 1 / 13,983,816.

The question tests the understanding of ‘Reversionary Bonus’ in the context of with-profits policies. A reversionary bonus is a bonus that is added to the sum assured and becomes a guaranteed part of the policy value. It is ‘reversionary’ because its full enjoyment or benefit is deferred until a future event, typically the maturity of the policy or the death of the insured. While it increases the policy’s value, it is not typically paid out as a separate cash payment during the policy term unless the policy is surrendered. Settlement options relate to how the final proceeds are paid, not the nature of the bonus itself. Subrogation is a principle of indemnity and does not apply to life insurance. A rider is an amendment to a policy, not a component of the bonus.

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. The question highlights a common scenario where an individual is acting as an intermediary without the necessary authorization, which is a contravention of the Ordinance. Understanding the IA’s role and the mandatory licensing for all insurance intermediaries is crucial for compliance and ethical practice within the Hong Kong insurance market. The other options represent incorrect regulatory bodies or incorrect licensing statuses, which would not be applicable in this context.

The question tests the understanding of how premium waiver riders handle premium payments during a disability period, specifically when the premium payment mode is annual. The provided text explains that if premiums are waived on an annual basis, and the insured recovers after a short period of disability (e.g., 2 months), the waiver would continue for the full annual period, potentially leading to an undesirable situation where premiums are waived even when the insured is no longer disabled. To address this, some policies automatically switch to a monthly premium mode for waiver purposes, or explicitly disallow changes to premium frequency during disability. Therefore, the most accurate statement is that the policy’s handling of premium frequency during a waiver period can lead to situations where premiums are waived for a longer duration than the actual disability, especially with annual premium payment modes, unless specific policy provisions are in place to manage this.

The question tests the understanding of the intermediary’s role in the application process, specifically concerning the disclosure of material facts. According to the syllabus, the application form is the primary source for underwriting, and intermediaries must ensure all material facts are disclosed. This includes providing full explanations for ‘Yes’ answers to health or other inquiries, along with relevant dates. Option (a) accurately reflects this responsibility by emphasizing the need for comprehensive disclosure and accurate recording of information. Option (b) is incorrect because while the intermediary assists, the applicant is ultimately responsible for the accuracy of their statements. Option (c) is too narrow, focusing only on financial changes and ignoring the broader disclosure requirements. Option (d) is incorrect as the intermediary’s role is to facilitate accurate disclosure, not to interpret the applicant’s intentions regarding future policy changes.

This question tests the understanding of disclosure requirements for insurance policies sold to Mainland China residents. The Insurance Authority (IA) mandates specific disclosure documents. The ‘Important Facts Statement for Mainland Policyholder’ is a crucial document that must be provided to these policyholders. Its purpose is to ensure they receive essential information about the policy in a clear and understandable format, aligning with regulatory expectations for cross-border insurance sales. The other options represent documents or concepts that are either not specific to this disclosure requirement or are not the primary document for this purpose.

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 intermediaries. 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 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 professional bodies may have their own codes of conduct, the primary legal requirement for transacting insurance business stems from the IA’s licensing regime. Furthermore, the Companies Ordinance (Cap. 622) primarily deals with company registration and corporate governance, not the licensing of insurance intermediaries. The Securities and Futures Ordinance (Cap. 571) governs the securities and futures markets and is not directly applicable to the licensing of insurance agents.

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. The question presents a scenario where an individual is soliciting insurance business without the necessary authorization, which constitutes a breach of the regulatory requirements. Therefore, the correct course of action for such an individual is to cease all activities until a license is obtained. Options B, C, and D describe actions that are either insufficient or incorrect in addressing the regulatory violation.

This 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 terminal illness criterion. Option B is incorrect because while a specified disease is a trigger, the scenario doesn’t provide enough information to confirm this. Option C is incorrect as the syllabus mentions a waiting period for diagnosis, not for the policy to be in force for a CI benefit. Option D is incorrect because the syllabus specifies a life expectancy of 12 months or less for terminal illness, not a general prognosis.

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) directly addresses these core principles by highlighting the need to verify the client’s financial capacity and the suitability of the policy for their needs, which are fundamental to responsible insurance sales practices and regulatory compliance.

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 be authorized by the Insurance Authority (IA) before conducting any insurance business. The scenario describes an entity that is not authorized, highlighting a direct contravention of the ordinance. Option B is incorrect because while intermediaries are regulated, the primary issue here is the unauthorized insurer itself. Option C is incorrect as the Mandatory Provident Fund Schemes Ordinance deals with retirement savings, not general insurance business authorization. Option D is incorrect because the Securities and Futures Ordinance governs regulated activities in the securities and futures markets, not the core business of insurance.

This question tests the understanding of disclosure requirements for insurance policies sold to Mainland China residents. The Insurance Authority (IA) mandates specific disclosures to ensure policyholders are fully informed. The ‘Important Facts Statement for Mainland Policyholder’ is a crucial document that must be provided in Chinese, as stipulated by regulatory guidelines, to ensure clarity and compliance with local language requirements for this specific customer segment. Providing it in English would not meet the regulatory expectation for effective communication and understanding by Mainland Chinese policyholders.

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. The question highlights a common scenario where an individual acts as an intermediary without the necessary authorization, which is a breach of the regulatory requirements. Understanding the IA’s role and the necessity of a license for any person conducting insurance intermediary business is crucial for compliance and ethical practice within the Hong Kong insurance market.