Paper 3 Long Term Insurance Quiz 89

The Insurance Authority’s Guideline on Underwriting Long Term Insurance Business (G L16) mandates that the board of directors is ultimately responsible for interpreting policyholder 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, and insurers must have a corporate policy on surplus allocation and dividend declarations, the final decision and responsibility for its fairness and consistency rests with the board.

This question tests the understanding of the regulatory framework governing insurance intermediaries in Hong Kong, specifically focusing on the responsibilities of licensed insurance agents and brokers under the Insurance Ordinance (Cap. 41). The scenario highlights a common situation where an intermediary might receive funds from a client intended for premium payments. The correct answer emphasizes the legal obligation to promptly remit these funds to the insurer or return them to the policyholder if the policy is not in force, as stipulated by regulations designed to protect consumers and ensure the integrity of the financial system. Failure to do so can lead to disciplinary actions by the Insurance Authority. The other options present scenarios that, while potentially problematic, do not directly address the core regulatory requirement of handling client premiums in accordance with the law.

The question tests the understanding of the specific disclosure requirements for recommending a single premium policy under the relevant regulations. It highlights the need for CIB members to clearly outline the premium/liquid asset ratio, the lock-in period, and any interest rate risks associated with premium financing or gearing. The other options present requirements that are either for regular premium policies or are not explicitly mandated disclosures for single premium policies in this context.

An Annuity Certain is characterized by its fixed payment period, irrespective of the annuitant’s survival. This distinguishes it from other annuity types that are contingent on life expectancy. The scenario describes a contract that guarantees payments for a specific duration, aligning with the definition of an Annuity Certain. Option B describes a life annuity, which ceases upon the annuitant’s death. Option C refers to a deferred annuity, which begins payments at a future date. Option D describes a variable annuity, where the payout fluctuates based on investment performance, not a fixed term.

This scenario describes an applicant who has disclosed a history of a serious medical condition that requires further investigation. According to underwriting principles, when an applicant’s disclosed health information necessitates a deeper understanding of a specific condition, the underwriter would typically request a specialized medical questionnaire. This questionnaire is designed to gather detailed information about the particular illness or condition, allowing the underwriter to accurately assess the risk. Standard risks are those without abnormal features, declined risks are uninsurable, and preferred risks are those with above-average health prospects, none of which fit this situation.

This question tests the understanding of the principle of indemnity in insurance, specifically its application to life insurance. Indemnity aims to restore the insured to the financial position they were in before the loss, without allowing for profit. Life insurance, however, pays a predetermined sum upon the occurrence of a specific event (death or survival), regardless of the precise financial loss incurred by the beneficiaries. This is because the value of a human life is considered immeasurable in monetary terms, and the purpose is to provide financial security and support rather than to compensate for a quantifiable financial deficit. Therefore, life insurance contracts are generally considered benefit policies, not indemnity policies, making statement (iii) and (iv) accurate.

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 as undergoing a medical procedure is a trigger, but the scenario describes a diagnosis, 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. 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. Option A correctly identifies the need for IA licensing. Option B is incorrect because while the Hong Kong Monetary Authority (HKMA) regulates banks, it does not directly license insurance intermediaries for their insurance activities. Option C is incorrect as the Securities and Futures Commission (SFC) regulates the securities and futures markets, not the general insurance intermediary business. Option D is incorrect because while professional bodies may set ethical standards, they do not grant the legal authority to conduct insurance business; that authority comes from the IA.

This question tests the understanding of the fundamental structure and ownership of a mutual life insurance company. In a mutual company, the policyholders are the owners. This ownership structure means that policyholders share in the profits and dividends of the company, as they are effectively the ‘members’ of the organization. Option (b) describes a proprietary company owned by shareholders. Option (a) is a characteristic of many companies, but not the defining feature of a mutual structure. Option (c) is partially correct as policyholders do share in profits, but it’s the ownership by policyholders that is the core definition, not just an equal sharing.

Policy revival, or reinstatement, refers to the process of restoring a lapsed insurance policy to its full coverage. This is typically permitted under the policy’s terms and conditions, but it is subject to specific requirements. These usually include a defined timeframe within which the revival must be requested, the settlement of all outstanding back premiums along with any applicable interest, and potentially other conditions stipulated by the insurer to ensure the policyholder’s insurability has not significantly changed. The question tests the understanding of the conditions and limitations associated with bringing a lapsed policy back into force.

This question tests the understanding of the regulatory framework governing insurance intermediaries in Hong Kong, specifically concerning the “fit and proper” requirements. The Insurance Authority (IA) mandates that all licensed insurance intermediaries must continuously meet these criteria. This includes demonstrating honesty, integrity, competence, and financial soundness. The scenario describes a situation where an intermediary has been found to have engaged in misleading practices, which directly impacts their ability to meet the integrity and honesty aspects of the “fit and proper” test. Therefore, the IA would likely take regulatory action to ensure compliance with the Insurance Ordinance (Cap. 41) and its subsidiary legislation, which outlines these requirements.

This question tests the understanding of the regulatory framework governing insurance intermediaries in Hong Kong, specifically focusing on the requirements for licensing and the implications of failing to meet these requirements. The Insurance Companies Ordinance (Cap. 41) and its subsidiary legislation, along with the guidelines issued by the Insurance Authority (IA), outline the conditions under which individuals and companies can conduct insurance business. Operating as an insurance agent or broker without a valid license is a contravention of these regulations, leading to potential penalties and invalidation of any business conducted. Option A correctly identifies the core legal requirement for conducting insurance business, which is obtaining the appropriate license from the IA. Option B is incorrect because while professional indemnity insurance is often a requirement for intermediaries, it is secondary to the primary licensing requirement. Option C is incorrect as the IA’s approval is part of the licensing process, not a separate, alternative pathway. Option D is incorrect because while adherence to conduct of business rules is crucial, it assumes a licensed status; operating without a license is the fundamental breach.

The question tests the understanding of the underwriting department’s role beyond just risk assessment. While risk assessment is a core technical function, the underwriting department also handles the practical arrangements for medical examinations and the associated documentation. This includes liaising with medical professionals, scheduling appointments, and ensuring all necessary medical information is collected and reviewed. Therefore, arranging and monitoring medical requirements is an integral part of the underwriting process within the broader company operations.

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 a license constitutes a breach of the law and can lead to penalties. Option B is incorrect because while the Hong Kong Federation of Insurers (HKFI) plays a role in industry self-regulation and promotion, it is not the licensing authority. Option C is incorrect as the Mandatory Provident Fund Schemes Authority (MPFA) regulates the MPF system, not general insurance intermediaries. Option D is incorrect because the Securities and Futures Commission (SFC) regulates the securities and futures markets, not the insurance sector.

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 demonstrate the potential variability of outcomes, particularly for investment-linked products. The pessimistic scenario illustrates a lower-than-expected performance, while the optimistic scenario shows 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 showcase the actuary’s expertise but to inform the policyholder. Option C is incorrect as the dividend history is a separate piece of information that can be browsed on a website, not directly represented by these scenarios. Option D is incorrect because while early termination can lead to losses, these scenarios are about illustrating potential future performance, not directly warning about the consequences of early termination, which is covered by other disclosure requirements.

This question tests the understanding of the regulatory framework governing insurance intermediaries in Hong Kong, specifically 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 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. Therefore, an individual seeking to solicit insurance business must first obtain a license from the Insurance Authority.

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.

An Annuity Certain is characterized by its fixed payment period, irrespective of the annuitant’s survival. This distinguishes it from other annuity types that are contingent on life expectancy. The scenario describes a contract that guarantees payments for a specific duration, aligning with the definition of an Annuity Certain. Option B describes a life annuity, which ceases upon the annuitant’s death. Option C refers to a deferred annuity, which begins payments at a future date. Option D describes a variable annuity, where the payout fluctuates based on investment performance, not a fixed term.

The ‘Entire Contract’ clause in an insurance policy signifies that the written contract, including the policy document, any attached endorsements, and the application for insurance, constitutes the complete agreement between the policyholder and the insurer. This means that no verbal promises or statements made outside of these written documents are legally binding. Therefore, any modifications or changes to the terms of the contract must be made in writing and agreed upon by both parties. Option (b) is incorrect because while policyowner agreement is necessary, it’s not the sole condition; the change must also be formally incorporated into the contract. Option (c) is partially correct as a policyowner request is often the catalyst for a change, but the change itself requires formal endorsement. Option (d) is incorrect as senior officials’ say-so does not override the contractual requirement for written agreement and endorsement.

This question tests the understanding of the ‘Cooling-off Period’ as stipulated by the Hong Kong Federation of Insurers (HKFI). The Cooling-off Period allows policyholders to reconsider their life insurance purchase. The period commences from the earlier of the policy delivery or the issuance of a notice to the policyholder or their representative. Therefore, if a policyholder receives the policy document on January 15th and a separate notice on January 10th, the Cooling-off Period begins on January 10th, ending 21 days later on January 31st. This highlights the importance of understanding the trigger event for the commencement of the period.

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 is incorrect because while understanding the client’s occupation is part of KYC, it’s not the primary driver for assessing affordability. Option C is incorrect as the insurer’s profit margin is an internal business consideration, not a KYC requirement related to the client. Option D is incorrect because while regulatory compliance is crucial, the specific focus of KYC in this context is on the client’s financial capacity and policy suitability, not solely on the insurer’s compliance procedures.

The question tests the understanding of after-sales service responsibilities within an insurance context, specifically focusing on the duties of the Policyowner Service (POS) department. Option A correctly identifies that handling premium payments is a core function of POS, as outlined in the provided text. Option B is incorrect because while policy changes are handled, the specific example of changing the type of insurance cover is a significant alteration that requires careful underwriting, not just administrative processing. Option C is incorrect as claims administration, particularly for non-life insurance where claims are less frequent, is a distinct function, and the text highlights that maturity claims are a specific type of claim handled differently. Option D is incorrect because while correspondence is a POS duty, the scenario describes a proactive communication about an upcoming event (maturity), which is a specific aspect of benefit administration rather than general correspondence.

The question tests the understanding of how dismemberment benefits are typically structured within an accident rider, specifically focusing on the conditions for receiving a reduced benefit. According to the provided text, policies often stipulate a payment that is a stated proportion of the accidental death benefit for specific lesser injuries, such as the loss of one limb or the sight in one eye. This aligns with option (a), which describes a scenario where a policy pays a reduced benefit for the loss of a single limb, reflecting the tiered structure of dismemberment coverage.

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 conduct regulated activities, such as advising on or arranging insurance contracts. 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 are incorrect because while professional bodies may have their own codes of conduct, the primary legal requirement for conducting insurance business is the IA’s license. 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, which is a different regulatory domain.

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, and the IA has the power to impose penalties, including fines and prohibition from carrying out regulated activities. The question highlights a scenario where an individual is acting as an intermediary without the proper authorization, which directly falls under the purview of the IA’s enforcement powers.

A mutual insurance company is legally owned by its participating policyholders, meaning they are the ultimate owners and have a claim on the company’s profits. This contrasts with proprietary companies, which are owned by shareholders. While a Board of Directors and senior management oversee operations, the fundamental ownership structure of a mutual company rests with its policyholders. The ability to raise new equity capital can be a challenge for mutuals due to their ownership structure.

An Annuity Certain is characterized by its fixed payment period, irrespective of the annuitant’s lifespan. This distinguishes it from annuities that are contingent on survival. The scenario describes a contract that guarantees payments for a specific duration, aligning with the definition of an Annuity Certain. Options B, C, and D describe different types of insurance or financial products that do not fit this fixed-term, life-independent payment structure.

The ‘Initiative on Financial Needs Analysis’ mandates that an FNA form must accompany applications for new life insurance policies falling under Class C or Class A of the Insurance Ordinance, with specific exclusions. These exclusions include term insurance, refundable policies for specific health coverages, yearly renewable non-cash value critical illness/medical policies, and group policies. Therefore, a policy that is a yearly renewable critical illness policy without cash value is exempt from the FNA requirement.

A joint-life policy that pays on the first death is designed to provide a payout when the first of the insured individuals passes away. This is often used for situations like covering a joint mortgage where the surviving spouse needs funds to pay off the remaining balance. The other options describe different types of policies or riders: a key person policy insures an individual whose death would financially impact a business, a level term insurance provides a fixed death benefit for a specified period, and a life income annuity with a period certain provides income for life with a guaranteed payout period.

A joint-life policy that pays on the first death is designed to provide a payout when the first of the insured individuals passes away. This is often used for situations like covering a joint mortgage where the surviving spouse needs funds to pay off the remaining balance. The term ‘joint-life basis’ refers to insuring multiple lives under a single policy. ‘Level Term Insurance’ refers to a policy where the death benefit remains constant throughout the term. ‘Key Person Life Insurance’ is for businesses insuring a crucial employee, and ‘Mortgage Indemnity Insurance’ protects lenders against property value depreciation, not directly against the death of the borrower.