Paper 3 Long Term Insurance Quiz 82

This question assesses the understanding of the regulatory framework governing the distribution of investment products in Hong Kong, specifically focusing on the responsibilities of licensed corporations under the Securities and Futures Ordinance (SFO). The scenario highlights a common situation where a licensed corporation is promoting a new fund. The core of the question lies in identifying the primary regulatory obligation related to ensuring that the marketing materials accurately reflect the fund’s nature and risks. This aligns with the principles of investor protection and fair dealing mandated by the Securities and Futures Commission (SFC). Option A is correct because the SFO and its subsidiary legislation, such as the Code of Conduct for Persons Licensed by or Registered with the SFC, place a strong emphasis on the accuracy and completeness of information provided to investors. Licensed corporations must ensure that all marketing and promotional materials are fair, clear, and not misleading. Option B is incorrect as while client suitability is crucial, it’s a separate obligation that follows the provision of accurate information. Option C is incorrect because while record-keeping is a general regulatory requirement, the immediate and primary concern in this scenario is the content of the promotional material itself. Option D is incorrect because while obtaining client consent is important for certain activities, it’s not the primary regulatory focus when it comes to the accuracy of the promotional material being disseminated.

Section 9 of the Law Amendment and Reform (Consolidation) Ordinance governs the assignment of legal choses in action, including interests in insurance contracts. A key requirement for a valid legal assignment is that the chose in action must be present, not future. While the actual enjoyment of an insurance benefit may be deferred to a future event, the policyholder’s rights under the contract are considered present and assignable. This is because the right to receive the benefit, even if contingent on future events, exists at the time of assignment. Options B, C, and D describe situations or concepts that are not the primary legal basis for the assignability of an insurance interest under the ordinance. Option B describes a future interest, which is generally not assignable. Option C refers to the insurer’s right of set-off, which is a consequence of assignment but not the basis for its validity. Option D describes a collateral assignment, which is a specific type of assignment with different implications than a general legal assignment.

This question tests the understanding of how dismemberment benefits are typically structured within accident riders, specifically focusing on the distinction between major and minor injuries and the corresponding benefit payouts. The scenario describes a policyholder suffering a specific injury (loss of a thumb) which falls under the category of ‘lesser injuries’ as defined in accident benefit schedules. These lesser injuries usually have a benefit payout that is a stated proportion of the main accidental death benefit, rather than the full benefit or a benefit tied to the loss of a major limb or sight. Option A correctly identifies this proportional payout for a lesser injury. Option B is incorrect because while dismemberment covers loss of limbs, the benefit for a thumb is typically a fraction of the full benefit. Option C is incorrect as ‘double indemnity’ applies to specific circumstances like public transport accidents, not the type of injury itself. Option D is incorrect because while loss of use is covered, the benefit amount is still proportional to the severity of the injury, and a thumb loss is considered a lesser injury.

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 found in favour of the claimant primarily because the policy had been in force for more than two years, triggering the incontestability provision. This provision generally prevents an insurer from voiding a policy due to misrepresentation or non-disclosure after a specified period, unless fraud can be proven. In this case, no evidence of fraud was presented. The panel also noted that the policyholder may not have been aware of the severity of his condition at the time of application, and that the duty of disclosure typically ends upon contract conclusion, which was considered to be the signing of the application. Therefore, the incontestability provision, as a shield against claims repudiation after a certain period, is the most relevant legal principle that would prevent the insurer from avoiding the contract in this specific situation, assuming no proven fraud.

The Guideline on Underwriting Long Term Insurance Business (Other Than Class C Business) (GL16) emphasizes the importance of a robust underwriting process to ensure the financial stability of the insurer and fair treatment of policyholders. A key aspect of this is the accurate assessment of risk. When an applicant provides incomplete or potentially misleading information regarding their medical history, the underwriter’s primary responsibility, as guided by GL16, is to seek clarification and obtain the necessary details to make an informed decision. This involves requesting further medical reports or clarification from the applicant, rather than immediately accepting the risk at standard rates, declining the application outright without further investigation, or assuming the undisclosed information is insignificant. The guideline stresses due diligence in risk assessment.

Section 64A of the Insurance Ordinance (Cap. 41) in Hong Kong specifically grants an insurable interest to a parent or guardian in the life of a minor (a person under 18 years of age). While blood relationships like spouse, parent, child, grandparent, and grandchild generally establish insurable interest in many jurisdictions, Hong Kong law, as stipulated in Section 64A, explicitly extends this to a parent or guardian concerning a minor. The question tests the understanding of this specific statutory provision in Hong Kong, differentiating it from broader common law principles. The other options are incorrect because while a spouse has an insurable interest, the law does not automatically grant it to an aunt or a sibling unless they are also a legal guardian of a minor.

This question tests the understanding of how inflation impacts long-term insurance policies, specifically focusing on the mechanism designed to counteract this effect. A Cost of Living Adjustment (COLA) rider is a provision that allows for periodic increases in benefits, such as disability income, to keep pace with inflation. These increases are typically tied to an independent economic indicator like the Consumer Price Index (CPI). Therefore, a rider that adjusts disability income benefits based on a recognized inflation index directly addresses the erosion of purchasing power caused by inflation over the policy’s term.

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 legitimate financial purpose, reflecting the core principles of KYC in this context. Option B is incorrect because while understanding the client’s background is part of KYC, it’s the financial capacity and policy purpose that are paramount for long-term insurance suitability. Option C is incorrect as the guidance focuses on the client’s financial situation and policy alignment, not solely on the insurer’s internal risk assessment framework. Option D is incorrect because while identifying beneficiaries is important, it’s secondary to understanding the policy’s suitability for the policyholder’s financial circumstances.

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 regulatory requirements. The other options represent incorrect interpretations of the licensing or 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 Companies Registry is responsible for company registration, not for licensing insurance intermediaries. Option D is incorrect because while professional bodies may offer certifications, they do not confer the legal authority to act as an insurance intermediary in Hong Kong; that authority stems solely from the IA’s license.

The Guidance Note on Conducting “Know Your Client” Procedures for Long Term Insurance Business (CIB-GN(4)) emphasizes the importance of understanding the customer’s financial situation and the purpose of the insurance policy. This includes assessing the affordability of premiums, the suitability of the product based on the client’s needs and risk tolerance, and identifying any potential money laundering or terrorist financing risks. While customer service and product innovation are important, they are not the primary focus of KYC procedures. The regulatory compliance aspect is crucial, but the core of KYC is about understanding the client’s profile and transaction patterns.

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 scenario describes an individual acting as a broker without the necessary authorization from the Office of the Commissioner of Insurance (OCI). This constitutes a breach of the law, as only licensed individuals or entities are permitted to solicit or conduct insurance business. The relevant legislation mandates that any person carrying on or holding out as carrying on the business of an insurance agent or broker must be licensed. Therefore, the individual’s actions are illegal and subject to penalties.

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 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 not mentioned. Option C is incorrect as the need for a medical procedure is a trigger, but it must be a *specified* medical procedure, which is not stated. Option D is incorrect because while a policyowner-insured might experience a critical illness, the benefit is contingent on the diagnosis of a *specified* condition or event as defined by the policy, not just any illness.

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 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 and engaging in such activities constitutes a breach of the Ordinance and can lead to penalties. Therefore, an individual acting as an insurance agent without a valid license is operating unlawfully.

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. Failure to obtain the necessary license constitutes a breach of the law and can lead to penalties. Option B is incorrect because while the Hong Kong Monetary Authority (HKMA) regulates banks, it does not directly license insurance intermediaries. Option C is incorrect as the Securities and Futures Commission (SFC) regulates the securities and futures markets, not insurance distribution. Option D is incorrect because the Mandatory Provident Fund Schemes Authority (MPFA) oversees the MPF system, which is a specific type of retirement scheme, but it does not grant licenses for general insurance intermediary activities.

This question tests the understanding of the ‘Cooling-off Period’ as mandated by the Hong Kong Federation of Insurers (HKFI) for life insurance policies. The period is designed to protect consumers from potential high-pressure sales tactics. The key aspect is the trigger for the commencement of this period, which is the earlier of the policy delivery or the issuance of a specific notice to the policyholder or their representative. Option (a) correctly identifies this trigger. Option (b) is incorrect because while a notice is relevant, it’s not solely about the notice being sent to the policyholder’s address, but rather the delivery of the policy or the notice itself. Option (c) is incorrect as the period is not tied to the premium payment date but rather the receipt of policy documents or a specific notice. Option (d) is incorrect because the period is not a fixed 30 days; it’s 21 days, and the trigger is specific as described.

This question tests the understanding of how inflation impacts long-term insurance policies, specifically focusing on the mechanism designed to counteract this effect. A Cost of Living Adjustment (COLA) rider is a provision that allows for periodic increases in benefits, such as disability income, to keep pace with inflation. These increases are typically tied to an independent economic indicator like the Consumer Price Index (CPI). Therefore, a rider that aims to maintain the real value of disability income benefits by adjusting them based on a recognized inflation index is the correct answer. Options B and C describe different types of riders or policy features that do not directly address the erosion of purchasing power due to inflation. Option D describes a benefit that is paid out upon the occurrence of a specified event, which is a general feature of many policies but not specifically an inflation adjustment mechanism.

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 advises, the applicant is ultimately responsible for the accuracy of the information provided. Option (c) is incorrect as the intermediary’s role is to facilitate accurate disclosure, not to interpret the applicant’s intentions. Option (d) is incorrect because the application form is the primary document for underwriting, and its accuracy is paramount; omitting details would be detrimental.

The Guideline on Underwriting Long Term Insurance Business (Other Than Class C Business) (GL16) outlines the principles and practices expected of insurers when assessing and accepting long-term insurance risks. A key aspect of this guideline is the emphasis on ensuring that underwriting decisions are based on sound actuarial principles and a thorough assessment of the risk presented by the applicant. This includes considering factors that could materially affect the mortality or morbidity experience of the insured pool. While the guideline promotes fair treatment of customers, its primary focus in underwriting is risk selection and pricing to maintain the financial stability of the insurer and protect policyholders. Therefore, the most appropriate action for an underwriter when faced with an applicant whose medical history suggests a significantly elevated risk of premature death, and for whom standard premium rates would be insufficient to cover the expected claims, is to offer the policy with an adjusted premium that reflects the increased risk. This ensures the policy is priced appropriately and the insurer can meet its future obligations.

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. This ensures that intermediaries meet certain standards of competence, integrity, and financial soundness, thereby protecting policyholders. Option B is incorrect because while the Hong Kong Federation of Insurers is a self-regulatory organization, it does not issue licenses. Option C is incorrect as the Mandatory Provident Fund Schemes Authority (MPFA) regulates MPF schemes, not general insurance intermediaries. Option D is incorrect because the Securities and Futures Commission (SFC) regulates the securities and futures markets, not insurance intermediaries.

This question tests the understanding of the core concept of an annuity contract as defined in insurance principles. An annuity is fundamentally a contract where an insurer agrees to provide a stream of payments over time to a designated recipient. This stream of payments is contingent upon the life of a specific individual (the annuitant) or a predetermined period. In exchange for these future payments, the insurer receives consideration, which can be a lump sum or a series of payments. The key elements are the insurer’s promise, the periodic payments, the designated recipient, the annuitant, and the consideration paid. Option A accurately captures these essential components, distinguishing it from other financial products or insurance riders.

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 in profits. The question tests the understanding of the fundamental difference in premium pricing between these two types of life insurance contracts, directly referencing the provided text.

The question tests the understanding of the core functions within an insurance company, specifically focusing on the department responsible for managing policyholder requests and changes. Client service, also known as policyowner service, encompasses a range of activities aimed at maintaining the relationship with existing policyholders. This includes processing changes to policies (financial or non-financial), handling communications (correspondence, enquiries, complaints), providing documentation (like policy duplicates), and managing policy renewals, which are crucial for business retention. While claims administration involves processing claims, marketing focuses on product development and promotion, and underwriting deals with risk assessment, none of these departments are primarily responsible for the ongoing administrative and service-related needs of existing policyholders.

This question tests the understanding of how dismemberment benefits are typically structured within accident riders, specifically focusing on the distinction between full and partial benefits. The provided text states that a sum equal to the accidental death benefit is usually payable for the loss of two limbs or total blindness, while a stated proportion of the accidental death benefit is paid for the loss of one limb, sight in one eye, or other specified lesser injuries. Therefore, the scenario where an individual loses one hand and the sight in one eye would fall under the category of lesser injuries, warranting a proportional payout rather than the full accidental death benefit.

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 agents and brokers. The question tests the knowledge that an individual must be licensed by the IA to lawfully solicit or transact insurance business in Hong Kong. Options B, C, and D represent incorrect scenarios: Option B describes an individual acting as a representative of a licensed insurer without being individually licensed, which is not permissible. Option C describes an individual acting as an appointed representative of a licensed insurance broker without being individually licensed, which is also not permissible. Option D describes an individual providing general financial advice without specifically soliciting or transacting insurance, which might fall under different regulatory regimes but does not exempt them from insurance licensing if insurance is involved.

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-related questions, along with relevant dates. Option (a) correctly reflects this duty by emphasizing the need for comprehensive details and dates when health issues are disclosed. Option (b) is incorrect because while the intermediary assists, the applicant is ultimately responsible for the accuracy of their statements. Option (c) is incorrect as the intermediary’s role is to ensure full disclosure, not to interpret the significance of facts for the applicant. Option (d) is incorrect because the application is the primary source for underwriting, and any omissions or inaccuracies can have significant consequences.

This question tests the understanding of the “cooling-off” period requirement under the Insurance Ordinance (Cap. 41), specifically concerning the cooling-off period for new policies. The Insurance Authority mandates a cooling-off period, typically 14 days, for most new long-term insurance policies. This period allows policyholders to reconsider their purchase and cancel the policy without penalty, receiving a refund of premiums paid, subject to certain deductions for medical examinations or other documented expenses incurred by the insurer. The scenario describes a policyholder who has just received their policy documents and wishes to cancel. The key is to identify the correct timeframe and the implications of cancellation within that period. Option A correctly identifies the 14-day period and the refund mechanism, aligning with regulatory requirements. Option B is incorrect because while a refund is generally due, it’s not always the full amount if expenses have been incurred. Option C is incorrect as the cooling-off period is a statutory right, not a discretionary offer. Option D is incorrect because the cooling-off period applies to new policies, not existing ones being amended, and the specific duration is usually 14 days, not 7.

This question tests the understanding of the implications of non-payment of premiums within the grace period for a life insurance policy. Specifically, it addresses the concept that the grace period is not a period of free insurance. If the insured dies during this period before the premium is paid, the outstanding premium is typically deducted from the death benefit. This prevents the insurer from bearing the full risk without receiving the due premium, while still providing a period for the policyholder to rectify the non-payment.

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 decision-making for consumers. It mandates that insurers clearly disclose specific information regarding the nature of the product, potential risks, fees, charges, and the cooling-off period. This proactive disclosure is designed to empower customers by providing them with the necessary details to understand their commitments and rights before finalizing an insurance contract. The form’s primary objective is to prevent misrepresentation and ensure that customers are fully aware of what they are purchasing, thereby fostering trust and upholding regulatory standards for consumer protection in Hong Kong’s insurance market.

The Guidance Note on Product Recommendation for Long Term Insurance Business (CIB-GN(12)) emphasizes the importance of suitability and appropriateness when recommending long-term insurance products. It mandates that intermediaries must assess the client’s financial situation, needs, and objectives to ensure the recommended product aligns with these factors. This includes understanding the client’s risk tolerance, investment horizon, and any specific financial goals they aim to achieve. The note also stresses the need for clear and transparent communication regarding product features, benefits, risks, and costs. Therefore, a recommendation that primarily focuses on the potential for high returns without a thorough assessment of the client’s overall financial profile and risk appetite would be considered inappropriate under these guidelines.

This question tests the understanding of the “cooling-off period” provision under the Insurance Ordinance (Cap. 41), specifically concerning the cooling-off period for long-term insurance policies. The Insurance Ordinance mandates a cooling-off period, typically 14 days, during which a policyholder can cancel a newly issued long-term insurance policy without penalty, provided certain conditions are met. This period allows consumers to reconsider their purchase after receiving the policy documents. The other options represent incorrect interpretations of policy cancellation rights or related regulatory provisions. Option B is incorrect as it refers to a general cancellation right which might involve penalties. Option C is incorrect as it misrepresents the typical duration and conditions of the cooling-off period. Option D is incorrect as it suggests a right to cancel at any time without any specified period or conditions, which is not a standard regulatory provision for long-term insurance.