Paper 3 Long Term Insurance Quiz 85

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, which, depending on the nature and extent of their involvement, could be construed as soliciting or transacting insurance business, thus requiring a license. The other options represent incorrect interpretations of the regulatory requirements. Option B is incorrect because while a company may be licensed, an individual acting on its behalf to solicit business generally also needs to be licensed. Option C is incorrect as the regulatory oversight extends beyond mere administrative support to activities that involve client interaction and influencing purchasing decisions. Option D is incorrect because while professional indemnity insurance is a requirement for licensed intermediaries, it does not exempt them from the initial licensing process.

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 highlights a common scenario where an individual is acting as an intermediary without the necessary authorization, which is a contravention of the Ordinance. The correct answer emphasizes the need for a valid license issued by the IA to conduct insurance intermediary activities legally. The other options present incorrect or irrelevant regulatory bodies or concepts, designed to test a candidate’s precise knowledge of the applicable legislation and supervisory authority.

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 regulatory requirements. Therefore, the correct course of action for such an individual is to cease these activities immediately and apply for the appropriate license from the IA.

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. The question tests the knowledge that an individual must be licensed by the IA to solicit or transact insurance business. 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 Hong Kong Monetary Authority (HKMA) regulates banks and other financial institutions, not insurance intermediaries directly. 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 comes solely from the IA’s license.

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.

This question tests the understanding of the fundamental purpose of life insurance from the policyholder’s perspective. The primary goal of purchasing life insurance is to provide financial security for beneficiaries upon the insured’s death. Therefore, the most crucial question an intermediary should ask is about the intended function of the insurance, which directly relates to the financial needs it is meant to address for the beneficiaries. Option (a) focuses on the policyholder’s wealth, which is relevant for affordability but not the core purpose. Option (b) is self-serving for the intermediary and irrelevant to the client’s needs. Option (c) is a subjective question that doesn’t elicit specific information about the policy’s intended use. Option (d) addresses affordability, which is a practical consideration, but secondary to understanding the ‘why’ behind the insurance purchase.

This question tests the understanding of underwriting actions for substandard risks, specifically focusing on the concept of a ‘debt on policy’ or lien. A debt on policy is a method used when the excess mortality risk is expected to decrease over time. It reduces the death benefit by a specified amount, which then gradually increases over the policy term until it reaches the full sum assured. This directly addresses the scenario where an applicant’s risk profile suggests a temporary adverse condition that is likely to improve, making it a suitable alternative to outright declinature or a flat premium loading. Loading the premium is a general method for substandard risks but doesn’t specifically address a decreasing risk profile. Declining the policy is a last resort. Deferring the decision is for temporary adverse conditions, not for managing an ongoing, albeit decreasing, substandard risk.

The scenario highlights the principle of utmost good faith in insurance, specifically the applicant’s duty to disclose material facts. Even though the applicant underwent a medical examination, the insurer rescinded the policy because the examination did not fully reveal pre-existing conditions like tachycardia and ectopic heartbeat. The Complaints Panel upheld the insurer’s decision, emphasizing the applicant’s ongoing obligation to disclose all relevant medical history. The Personal Data (Privacy) Ordinance is mentioned in the context of how insurers gather information, requiring transparency about the need for tests and informing the applicant of the results. However, the core issue remains the applicant’s breach of the duty of disclosure, which, according to the provided text, renders the contract voidable by the insurer, unless an incontestability provision applies and the contestable period has passed without proof of fraud.

The level premium system, as described, allows for an unchanging annual premium throughout the policy’s duration. This is achieved by charging a premium in the early years that is higher than the immediate risk of death, and in later years, a premium that is lower than the actual risk. The excess premiums collected in the early years, along with the interest earned on them, accumulate to form a reserve fund. This reserve is crucial for covering the increased risk of mortality in the later years of the policy. Therefore, the early years’ ‘excess’ premiums, combined with investment returns, are used to build this reserve to meet future liabilities.

When replacing an existing life insurance policy with a new one, the insurance intermediary must meticulously document and explain various implications to the client. This includes detailing any riders or supplementary benefits present in the old policy that are absent in the new one. The intermediary is also obligated to provide a clear rationale for why the new policy is considered more suitable, unless the client explicitly waives this requirement. Furthermore, the intermediary must address whether alternative options to policy replacement were presented to the client. These disclosures are crucial for ensuring informed decision-making and compliance with regulatory requirements designed to protect consumers from potentially detrimental policy replacements, often referred to as ‘twisting’.

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 question presents a scenario where an individual is acting as a referral agent for an insurance company without holding the necessary license. This action constitutes a breach of the regulatory requirements, as referral activities that lead to the solicitation or transaction of insurance business are considered regulated activities requiring a license. Therefore, the individual is acting unlawfully and is subject to enforcement actions by the IA.

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 a cash payment made during the policy term. Settlement options relate to how the final proceeds are paid, subrogation is a principle not applicable to life insurance, and a rider is an amendment to the policy, not a bonus distribution.

A collateral assignment is a temporary arrangement where a life insurance policy is used as security for a loan. In such cases, the assignee’s rights are limited to the amount of the loan plus any accrued interest. The assignor retains the right to reclaim full ownership of the policy once the loan is fully repaid. Crucially, during the period of a collateral assignment, the assignor is typically restricted from exercising certain policy rights, such as taking out a policy loan or surrendering the policy, as these actions would diminish the security provided to the assignee.

Participating (PAR) life insurance policies are designed to share in the insurer’s divisible surplus, if any, typically through policy dividends. This potential for profit sharing means that the premiums charged for PAR policies are generally higher than those for non-participating (NON-PAR) policies, which do not offer such a benefit. The question tests the understanding of the fundamental difference in premium structure between these two types of policies, directly relating to the concept of ‘PAR or NON-PAR’ as a factor influencing life insurance premium rating.

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 situation where a licensed corporation is promoting a new fund. The core principle being tested is the requirement for licensed corporations to ensure that their representatives are adequately trained and competent to provide advice on or distribute the specific products they are handling. This aligns with the SFC’s emphasis on investor protection and the suitability of products for clients, as mandated by various conduct provisions within the SFO and its subsidiary legislation, such as the Code of Conduct for Persons Licensed by or Registered with the Securities and Futures Commission. The correct answer emphasizes the proactive step of verifying the competence of the sales team, which is a fundamental aspect of compliance and responsible product distribution.

This question tests the understanding of how a conditional premium receipt functions in life insurance applications. A conditional receipt signifies that coverage begins from the application date, but this is contingent upon the applicant being found insurable on standard terms at that time. If the applicant is found insurable but on different terms (e.g., higher premium, reduced coverage), the contract doesn’t commence until these revised terms are accepted. If the applicant becomes uninsurable or dies after applying but before the policy is issued, they are still covered if they were insurable at the application date. The scenario describes a situation where the applicant is found insurable, but on modified terms, meaning the initial offer wasn’t accepted as is, and thus the contract doesn’t start until the revised terms are agreed upon. Therefore, the insurance is not effective from the date of application in this specific instance.

This question tests the understanding of how a conditional premium receipt functions in life insurance applications. A conditional receipt signifies that coverage begins from the application date, but this is contingent upon the applicant being found insurable on standard terms at that time. If the applicant is found insurable but on different terms (e.g., higher premium, reduced coverage), the contract doesn’t commence until these revised terms are accepted. If the applicant becomes uninsurable or dies after applying but before a policy is issued, they are still covered if they were insurable at the application date. The key is the insurability at the time of application, not the issuance of the final policy.

This question tests the understanding of the “cooling-off” period for insurance contracts in Hong Kong, specifically concerning the right to cancel without penalty. The Insurance Companies Ordinance (Cap. 41) and its subsidiary legislation govern such provisions. A typical cooling-off period allows policyholders to review the policy and cancel it within a specified timeframe, usually receiving a refund of premiums paid, less any administrative charges or the cost of any cover already provided. Option A correctly identifies the standard practice of refunding premiums less any expenses incurred by the insurer. Option B is incorrect because while the insurer can deduct expenses, it’s not a fixed percentage but rather actual costs. Option C is incorrect as the cooling-off period is a statutory right, not a discretionary offer. Option D is incorrect because the policyholder is generally entitled to a refund of premiums paid, not just a portion of the initial premium.

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 constitutes a breach of the regulatory requirements, leading to potential penalties and invalidation of any business conducted.

The question tests the understanding of the purpose of providing pessimistic and optimistic scenarios in benefit illustrations, as mandated by regulatory guidelines. These scenarios are designed to showcase the potential variability of outcomes, particularly for investment-linked products. The pessimistic scenario illustrates a lower-than-expected performance, while the optimistic scenario depicts a higher-than-expected performance. This helps policyholders make more informed decisions by understanding the range of potential results, rather than just a single projected outcome. Option B is incorrect because while the company’s Appointed Actuary sets assumptions, the primary purpose of these scenarios is not to demonstrate the actuary’s skill. Option C is incorrect as the scenarios are not solely for illustrating the company’s dividend history, which is a separate point of reference. Option D is incorrect because the scenarios are not intended to guarantee future performance but rather to illustrate potential outcomes based on different market conditions.

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 describe activities that are either not directly related to intermediary licensing or are permissible under different circumstances, making them incorrect in this context.

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 death. Conversely, annuities are structured to provide income during a period of survival, with benefit payments increasing with age at commencement because the insurer anticipates a longer payout period. This is directly related to the underwriting philosophy of each product, where life insurance mitigates the risk of dying too soon, and annuities mitigate the risk of living too long.

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 information provided about PAR policies being subject to higher premium rates.

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 customer protection is a goal, the fundamental violation is operating without a license, not a specific misrepresentation in policy terms.

This question tests the understanding of the regulatory framework governing insurance intermediaries in Hong Kong, specifically focusing on the requirements for licensing and the scope of activities permitted. The Insurance Companies Ordinance (Cap. 41) and its subsidiary legislation, along with guidelines issued by the Insurance Authority (IA), define these requirements. An individual acting as a broker, representing multiple insurers and advising clients on a range of insurance products, must be licensed as an insurance broker. This licensing ensures that intermediaries meet certain competency, integrity, and financial soundness standards, thereby protecting policyholders. Simply being an employee of an insurer does not exempt one from needing a separate license if they are soliciting or transacting insurance business independently or on behalf of multiple entities. Similarly, while a company might be licensed, individuals within that company who conduct regulated activities must also be licensed. Therefore, the most accurate description of the required authorization for an individual performing these functions is to be a licensed insurance broker.

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 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 Office of the Privacy Commissioner for Personal Data (PCPD) focuses on data privacy, which is a separate regulatory concern from licensing insurance intermediaries.

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 the principle of utmost good faith and the need for accurate risk assessment, is to seek clarification and verify the information. This ensures that the policy is priced appropriately based on the actual risk presented, preventing adverse selection and protecting the insurer from potential losses. Directly issuing the policy without addressing the discrepancies would be a breach of sound underwriting practice and could expose the insurer to undue risk. Delaying the decision indefinitely without attempting to resolve the issue is also not a proactive approach. While seeking additional medical reports is a valid step, the immediate and most crucial action is to address the applicant’s incomplete disclosure.

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 loss is the death of the insured, which is difficult, if not impossible, to quantify financially in the same way as property damage or liability. Therefore, life insurance policies are typically structured as ‘benefit policies’ or ‘valued policies,’ where a predetermined sum is paid upon the occurrence of the insured event (death), rather than attempting to indemnify the financial loss. This contrasts with general insurance (like fire or motor insurance), which are usually indemnity contracts. Statement (iii) correctly identifies that life insurance contracts are not normally subject to indemnity, and statement (iv) further clarifies that indemnity does not typically apply to life insurance due to the prevalence of benefit policies. Therefore, both (iii) and (iv) are true.

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 candidate’s knowledge of which entity is empowered to grant licenses to individuals or companies wishing to conduct insurance intermediary business. Option A correctly identifies the Insurance Authority. Option B, the Hong Kong Monetary Authority (HKMA), regulates the banking sector. Option C, the Securities and Futures Commission (SFC), regulates the securities and futures markets. Option D, the Financial Services and the Treasury Bureau (FSTB), is a government bureau responsible for policy formulation, not direct licensing of intermediaries.

This question tests the understanding of the regulatory framework governing insurance intermediaries in Hong Kong, specifically focusing on the requirements for licensing and the scope of activities permitted. The Insurance Companies Ordinance (Cap. 41) and its subsidiary legislation, along with guidelines issued by the Hong Kong Insurance Authority (IA), outline these requirements. An individual acting as a broker, advising on and arranging insurance contracts for clients, is considered an insurance agent or broker, depending on their relationship with the insurer and client. To legally conduct such activities, they must be licensed by the IA. The scenario describes activities that fall squarely within the definition of regulated insurance intermediary services. Therefore, obtaining a license is a mandatory prerequisite.