Paper I - Principles and Practice of Insurance

According to the guidelines for licensed insurance agents in Hong Kong, several key pieces of information must be disclosed to clients. This includes the name of the insurer, major policy terms and conditions, the premium level and payment period, and any fees or charges. Additionally, agents must explain the principle of utmost good faith, the types of material facts that must be disclosed, and any declarations required in the application. This ensures transparency and helps clients make informed decisions, aligning with the Insurance Companies Ordinance and related regulations. Therefore, statements I, II and III are correct.

According to the Insurance Authority (IA) guidelines for Continuing Professional Development (CPD), individual licensees are required to report their Qualified CPD Activities to the IA using a CPD Declaration Form. This form must be submitted in the prescribed format and manner within two months after the end of the relevant Assessment Period, specifically by September 30th. Licensees must also inform their principals about the reported CPD activities by the same deadline. It is essential to retain documentary evidence of attendance or completion of all reported Qualified CPD Activities for at least three years after the Assessment Period’s expiration, and this evidence should be readily available for compliance checks by the IA upon request. Excess CPD hours cannot be carried forward to subsequent Assessment Periods. Principals also bear responsibility for ensuring their appointed individual licensees comply with CPD requirements, including monitoring and verifying the CPD Declaration Forms submitted to the IA.

Reinsurance is a mechanism where insurers transfer a portion of their risk to another insurer (the reinsurer). This helps insurers manage their risk exposure and capacity. Outwards reinsurance refers to when an insurer purchases reinsurance to protect its own portfolio. Inwards reinsurance is when an insurer acts as a reinsurer, accepting risks from other insurers. Professional reinsurers focus solely on providing reinsurance services. This question assesses the understanding of the core concepts of reinsurance within the context of the HK IIQE exam syllabus.

Actual authority arises from the principal’s explicit or implicit consent for the agent to act on their behalf. This can be expressed through direct communication or implied through the principal’s conduct or the established course of dealing. Apparent authority, on the other hand, stems from the principal’s representations to third parties, leading them to reasonably believe that the agent has the authority to act. Authority of necessity arises in emergency situations where someone acts to protect another’s interests when communication is impossible. Agency by estoppel occurs when a principal’s actions lead a third party to believe someone is their agent, preventing the principal from later denying that authority. In the scenario, the agent is acting outside of their actual authority. However, the insurer’s previous actions of honoring the agent’s acceptance of risks have created an apparent authority. Therefore, statements I and II are correct.

Short-tail business in insurance refers to classes where claims arise and are notified relatively quickly. Fire insurance and motor (own damage) insurance are typical examples due to the immediate nature of the events leading to claims. A simple contract can be created verbally, in writing (not under seal), or inferred from conduct. The solvency margin is the extent to which an insurer’s assets exceed its liabilities, and Hong Kong insurers must maintain a solvency margin that meets the minimum required amount. Therefore, statements I and II are correct.

The Insurance Authority (IA) has the power to impose pecuniary penalties to protect policyholders and the public interest, encourage proper conduct, deter misconduct, and prevent regulated persons from benefiting from misconduct. GL22 outlines considerations for exercising this power, including the nature, seriousness, and impact of the conduct; the behavior of the regulated person since the conduct was identified; the previous disciplinary record and compliance history of the regulated person; and other relevant factors. Statutory conduct requirements under Sections 90, 91, and 92 of the Insurance Ordinance require licensed insurance intermediaries to act honestly, fairly, and in the best interests of the policyholder, exercise reasonable care, skill, and diligence, and only advise on matters within their competence. Therefore, statements I, II and III are correct.

Life and personal accident insurance are benefit policies, providing a predetermined sum upon the occurrence of an insured event like death or injury, rather than indemnifying the policyholder for a financial loss. These policies often involve an unlimited insurable interest. Indemnity aims to restore the insured to their pre-loss financial position, typically through cash payment, repair, replacement, or reinstatement. Salvage refers to the remaining value of damaged property after a loss, which is considered when calculating the indemnity. Abandonment, primarily in marine insurance, involves surrendering the insured property to the insurer in exchange for a total loss payment. Policy provisions like average clauses and excesses can prevent full indemnity. Therefore, statements I and II are correct.

The ‘more specifically insured’ provision is designed to prevent double recovery where an item is covered under multiple insurance policies. If an item is covered by a specific policy (e.g., an ‘all risks’ policy), a less specific policy (e.g., household contents insurance) will exclude that item to avoid contribution. This ensures that the insured does not profit from the loss by claiming from multiple policies for the same item. . The Motor Insurers’ Bureau (MIB) of Hong Kong compensates victims of motor accidents where insurance is absent or defective, aligning with compulsory motor insurance intentions. . ‘New for Old’ cover means claims are settled without deductions for wear and tear, but this doesn’t apply universally to all items, as some items like clothing might be excluded. Therefore, statement III is incorrect. A non-contribution clause prevents an insurer from contributing to a claim settlement when double insurance exists, which is the opposite of what statement IV suggests. Therefore, statement IV is incorrect. Therefore, statements I and II are correct.

The Anti-Money Laundering and Counter-Terrorist Financing Ordinance (AMLO) mandates that insurance institutions, including authorized insurers, licensed individual insurance agents, licensed insurance agencies, and licensed insurance broker companies, conduct Customer Due Diligence (CDD) and maintain records for a specified duration to prevent and detect money laundering and terrorist financing activities. Breaching the AMLO requirements can lead to criminal or supervisory sanctions. The most severe violation can result in a fine of HK$1 million and imprisonment for up to 7 years. Disciplinary actions may include public reprimands, orders for remedial action, and pecuniary penalties up to the greater of HK$10 million or three times the profit gained (or cost avoided) due to the contravention. Therefore, adhering to CDD and record-keeping requirements under the AMLO is crucial for insurance institutions to avoid severe penalties and maintain regulatory compliance in Hong Kong.

The Insurance Ordinance (IO) serves as the primary legislation governing the insurance sector in Hong Kong. It establishes the regulatory framework within which insurers must operate. Understanding the IO is crucial as it dictates the standards and practices expected of insurance companies, ensuring stability and consumer protection within the industry. The IO covers various aspects such as the authorization of insurers, their financial soundness, and the conduct of insurance business. Therefore, possessing a strong understanding of the IO is essential for anyone involved in the insurance industry in Hong Kong.

When an insurer pays a claim under an indemnity policy, they are entitled to step into the shoes of the insured and pursue any rights or remedies the insured may have against a third party who caused the loss. This prevents the insured from receiving double compensation for the same loss. Subrogation rights can arise in tort, contract, under statute, and in salvage cases. The insurer’s recovery under subrogation is limited to the amount they have paid as indemnity. This principle ensures that the insured is made whole but does not profit from the loss. As per the IIQE syllabus, understanding subrogation is crucial in insurance claims and preventing unjust enrichment.

The Insurance Authority (IA) assesses the competence of licensed insurance agencies and broker companies based on several aspects. These include the organizational structure, the expertise of those supervising regulated activities, and the feasibility of the business strategy. The IA also considers the adequacy of internal controls and risk management policies, especially regarding compliance with regulations, risk mitigation, and the recruitment/training of qualified staff. Furthermore, the IA evaluates the reputation, reliability, honesty, and integrity of the business entity, considering factors such as compliance history and any disciplinary actions. All these factors are critical in ensuring that the business entity operates responsibly and ethically within the insurance industry in Hong Kong, aligning with the requirements under the Insurance Ordinance (IO) and other applicable regulatory requirements.

The Personal Data (Privacy) Ordinance sets out specific situations where personal data can be used without consent. When the use of personal data is directly related to the prevention or detection of crime, the data protection principles can be waived. This exception is designed to allow organizations to take necessary actions to combat illegal activities. Other scenarios listed, while important, do not automatically override the need for consent under the Ordinance.

Licensed insurance brokers in Hong Kong must adhere to strict standards of conduct to maintain the integrity of the insurance market and protect consumers. Providing accurate and truthful information is paramount. Misleading or deceptive practices undermine trust and can lead to financial harm for clients. The Insurance Authority (IA) emphasizes the importance of transparency and honesty in all dealings with clients.

According to the guidelines set forth by the IA, a licensed insurance broker is expected to ensure that all representations and information provided to clients are accurate and not misleading. This includes information about insurers, insurance intermediaries, and insurance products. Brokers must also avoid making inaccurate or deceptive statements to induce clients to enter into or replace insurance policies. Advertising and marketing materials must contain only accurate information and should not be disparaging, misleading, or deceptive. Furthermore, a broker’s company name should not be misleading or create a false impression of affiliation with other entities. Compliance with these standards, as well as all applicable laws, rules, regulations, codes, and guidelines issued by the IA and other regulatory authorities, is essential for maintaining a valid license and upholding ethical conduct in the insurance industry.

Therefore, providing a client with a policy illustration that exaggerates potential returns is a violation of these principles.

When an insurance claim is made, two key aspects must be carefully considered: the insurer’s obligation under the policy and the amount to be paid. Determining whether the insurer is liable involves examining the policy terms and the circumstances of the claim to see if coverage applies. In liability insurance, it’s also essential to confirm if the insured is legally responsible to the third-party making the claim. The quantum refers to determining the payable amount. While life insurance payouts are usually predetermined, other types of insurance may require detailed assessment and negotiation to determine the appropriate compensation. Reinsurance is a tool used by insurers to manage their risk by transferring some of it to another insurer. This helps insurers maintain financial stability and underwriting capacity. Actuaries play a vital role in insurance by applying mathematical and statistical expertise to assess risks, calculate premiums, and determine reserves, especially in long-tail business where claims develop over extended periods. The Insurance Authority in Hong Kong requires insurers to appoint qualified actuaries and conduct regular valuations of assets and liabilities. Accountants maintain accurate financial records, manage collections, and ensure the financial stability of the insurance company.

A policy franchise operates by eliminating small claims. If the loss exceeds the franchise threshold, the entire loss becomes payable. This differs from an excess, where the insured always bears the excess amount regardless of the total loss size. Policy limits, on the other hand, define the maximum amount an insurer will pay, regardless of the loss calculation. Reinstatement insurance ensures that no deductions are made for wear and tear or depreciation when settling claims. Understanding these distinctions is crucial for insurance professionals in Hong Kong, as it directly impacts how policies are interpreted and claims are handled under the regulatory framework of the IIQE.

The Insurance Authority (IA) has established guidelines (GL22) for exercising its power to impose pecuniary penalties on regulated persons. These penalties serve several key purposes: protecting policyholders and the public, promoting proper conduct standards, deterring misconduct, preventing individuals unfit for their roles from holding them, and preventing those guilty of misconduct from profiting from it. The IA considers a pecuniary penalty a severe sanction, with public reprimands being more severe than private ones. When determining whether to impose a penalty and its amount, the IA considers all circumstances and relevant factors, including the nature, seriousness, and impact of the conduct; the regulated person’s behavior since the conduct was identified; their previous disciplinary record and compliance history; and other relevant factors. The IA aims for penalties that are effective, proportionate, and fair, increasing in severity with the seriousness of the misconduct or unsuitability of the person.

Prompt payment of bills and debts is a fundamental aspect of an insurer’s financial management, involving routine tasks that are crucial for maintaining financial health. Investment activities, whether managed by a separate department or the accountant, are vital for the security, return, and liquidity of the company’s assets. Training and development are essential for both in-house personnel and field staff, ensuring relevance to the company’s goals and effectiveness in enhancing its operations. Key persons in control functions, such as those responsible for financial control, risk management, and intermediary management, play a critical role in an insurer’s corporate governance structure, subject to approval by the Insurance Authority. Therefore, all of the above statements are correct.

According to the Insurance Ordinance, the IA can take disciplinary actions against a licensed insurance intermediary, responsible officer, or regulated person if they are deemed unfit and improper. This includes scenarios where the individual has been convicted of an offense that, in the IA’s opinion, affects their fitness and properness to remain licensed or approved. The IA’s powers include revoking or suspending licenses, disapproving responsible officer status, prohibiting future applications, issuing reprimands, and imposing pecuniary penalties. The key consideration is whether the conviction impugns the fitness and properness of the individual to continue in their regulated role within the insurance industry. Therefore, the IA’s decision hinges on its assessment of the impact of the conviction on the individual’s suitability to perform their duties.

The Code of Conduct for Licensed Insurance Brokers aims to establish minimum standards of professionalism and explain statutory conduct requirements. It serves as a guide for the Insurance Authority (IA) in assessing the conduct of brokers and does not have the force of law. The IA recognizes the varying scales and complexities of different broker businesses and will consider the relevant context when assessing compliance. Therefore, the Brokers’ Code does not have the force of law.

The Insurance Complaints Bureau (ICB) handles complaints that meet specific criteria to ensure fair resolution. These conditions include the monetary nature of the complaint, a maximum claim amount of HK$1,000,000, the insurer’s ICB membership, the policy being a personal insurance policy, the complainant’s status as a policyholder or rightful claimant, the insurer’s final decision on the matter, the complaint being filed within six months of the insurer’s final decision, and the complaint not arising from commercial, industrial, or third-party insurance, or being subject to legal proceedings. Understanding these conditions is crucial for determining the ICB’s jurisdiction and the types of complaints it can address. Therefore, the scenario where a complaint meets all the specified conditions falls within the ICB’s terms of reference.

In instances where an insurer discovers a breach of the duty of utmost good faith, several remedies are available. The insurer can choose to void the contract within a reasonable timeframe from the policy’s start. This action typically involves returning premiums and claim payments made before the breach was known, unless the insured or their agent committed a fraudulent breach. The insurer might also pursue a tort claim for damages if the breach involved fraudulent or negligent misrepresentation. Alternatively, the insurer can waive the breach, which validates the contract retroactively. It’s important to note that an insurer cannot selectively refuse a claim while keeping the policy active and retaining the premium, as partial rescission is not a permissible remedy. This principle is vital for understanding the remedies available to insurers under the Insurance Ordinance and relevant regulations in Hong Kong.

Customer service in insurance encompasses handling inquiries, maintaining public relations, managing documentation requests, and addressing complaints fairly and promptly. Marketing and promotion involve coordinating external communications, media interactions, promotions, advertising campaigns, sponsorships, and conducting market research. Insurance sales focus on product liaison, sales enhancement programs, and monitoring results. Underwriting involves selecting risks, determining insurance terms, and monitoring results for renewals. Therefore, understanding the distinct roles and responsibilities of each function is crucial for effective insurance operations and regulatory compliance in Hong Kong.

The Independent Commission Against Corruption (ICAC) plays a crucial role in maintaining integrity within the insurance industry. According to the Prevention of Bribery Ordinance (PBO), a licensed insurance broker company must not solicit or accept advantages without client permission when acting on the client’s behalf. Similarly, offering advantages to an agent to influence their actions regarding their principal’s affairs is prohibited without the principal’s consent. General Principle 2 emphasizes that brokers must always prioritize their clients’ best interests and treat them fairly. This includes providing impartial advice, sourcing suitable insurance products from a range of insurers, and avoiding unreasonable dependence on any single insurer. Brokers must also make reasonable inquiries to obtain complete and accurate client information before providing regulated advice, ensuring that recommendations are based on a thorough understanding of the client’s circumstances. These measures ensure that brokers act ethically and professionally, upholding the integrity of the insurance industry and protecting the interests of their clients. These principles are vital for IIQE exam preparation, focusing on ethical conduct and client-centric practices.

Licensed insurance brokers in Hong Kong must adhere to strict standards of conduct to maintain the integrity of the insurance market and protect consumers. These standards, overseen by the Insurance Authority (IA), include ensuring that all information provided to clients is accurate and not misleading, and that advertising and marketing materials are truthful and not deceptive. Brokers must also comply with all applicable laws, rules, regulations, codes, and guidelines issued by the IA and other regulatory bodies. Furthermore, brokers are expected to cooperate with the IA and other regulatory authorities in any matters concerning their regulated activities. The use of names that could mislead clients about affiliations is also prohibited. These measures collectively aim to foster trust and transparency in the insurance industry, ensuring that clients receive reliable advice and are not subject to unfair practices. Therefore, presenting accurate information about insurance products aligns with the regulatory requirements for licensed insurance brokers.

When an existing customer or beneficial owner is identified as a non-Hong Kong Politically Exposed Person (PEP), enhanced due diligence (EDD) measures are crucial. These measures, as outlined in regulatory guidance, include obtaining senior management approval to continue the business relationship and taking reasonable steps to ascertain the source of wealth and funds of the customer or beneficial owner. Ongoing monitoring is also essential, involving continuous review of customer-related documents and scrutiny of transactions to ensure consistency with the institution’s knowledge of the customer and their risk profile. Furthermore, institutions must screen customers against updated sanctions lists and conduct enhanced checks to determine genuine matches, reporting any suspicions of terrorist financing, proliferation financing, or sanctions violations to the Joint Financial Intelligence Unit (JFIU).

The Independent Commission Against Corruption (ICAC) plays a crucial role in maintaining integrity within the insurance industry. According to the guidelines, a licensed insurance broker company must not solicit or accept any advantage as an inducement or reward for taking action related to a client’s affairs without first obtaining permission from that client. Similarly, offering an advantage to another person who is an agent as an inducement or reward for taking action related to the agent’s principal, without the principal’s permission, is prohibited. This is to ensure that brokers act in the best interests of their clients and treat them fairly, as outlined in General Principle 2. A licensed insurance broker should always place the interests of clients before all other considerations, treat the client fairly, and give suitable, impartial, and objective advice, which takes account of the client’s interests. Therefore, statements I and II are correct.

According to the Insurance Authority (IA), individuals applying for an insurance agent license must meet specific educational qualifications. A Diploma Yi Jin is explicitly listed as one of the acceptable qualifications. While other qualifications like a degree from a recognized university or specific insurance qualifications are also acceptable, the question specifically asks about the listed qualifications. Therefore, a Diploma Yi Jin satisfies the educational requirements for an insurance agent license.

The Prevention of Bribery Ordinance (POBO) in Hong Kong, enforced by the ICAC, aims to maintain a corruption-free environment. Section 9(1) of the POBO prohibits an agent from soliciting or accepting any advantage without the principal’s permission. Section 9(2) states that both offering and accepting an advantage constitute an offense. Section 9(3) addresses the use of false documents to deceive the principal. Wire transfers are addressed in GL3, which provides guidance on wire transfers, which primarily applies to authorized institutions and money service operators. Other FIs should also comply with section 12 of Schedule 2 and the guidance on wire transfers if they act as an ordering institution, an intermediary institution or beneficiary institution as defined under the AMLO. Therefore, statements I and II are correct.

Insurance intermediaries, encompassing both agents and brokers, are expected to act with utmost integrity. This includes avoiding fraudulent activities, maintaining fairness, refraining from exploiting vulnerabilities of clients, and avoiding undue influence. Their actions must adhere to legal standards, both in letter and spirit. For insurance brokers, their primary duty is to the policyholder, requiring them to offer impartial advice and prioritize the client’s interests. They are considered experts and can be held liable for professional negligence if they fail to exercise reasonable care. Insurance agents, on the other hand, primarily represent the insurer, though they must still uphold ethical and legal obligations. The degree of expertise expected from an agent is generally lower than that of a broker, affecting their potential liability. Both agents and brokers must comply with the Insurance Ordinance (IO) and related regulations issued by the Insurance Authority (IA).