Paper II - General Insurance

Insurance brokers in Hong Kong are expected to adhere to specific ‘minimum requirements’ set by the Insurance Authority. These requirements aim to ensure the integrity and stability of the insurance broking industry, safeguarding the interests of clients. A crucial aspect of these requirements is the maintenance of separate client accounts. This segregation ensures that client funds are protected and not used for the broker’s operational expenses or other purposes. This protects client funds and ensures transparency.

While qualifications and experience, professional indemnity insurance, and the fitness and properness of insurance brokers are all important aspects of regulatory oversight, they do not directly address the handling and protection of client funds in the same way that separate client accounts do. Therefore, maintaining separate client accounts is the most direct and relevant measure for protecting client funds among the options provided. This aligns with the Insurance Authority’s focus on financial prudence and client protection within the insurance broking industry in Hong Kong. Therefore, the act of keeping client’s money separate from the broker’s own funds is the correct answer.

When a general insurance policy is up for renewal in Hong Kong, several key principles come into play. Firstly, the duty of utmost good faith is re-established, requiring both the insurer and the insured to act with complete honesty and transparency. Secondly, the renewal is considered a new contract, meaning all terms and conditions are subject to review and potential change. Thirdly, the terms of the renewal are negotiable, allowing both parties to discuss and agree upon the coverage, premium, and other relevant aspects. Therefore, statements I, II, and III only are correct.

Customer service standards are crucial for insurers in Hong Kong. These standards, often declared publicly, represent a commitment to quality, professional ethics, and fair claims handling. Insurers implement these standards through internal audits and are subject to monitoring by policyholders, industry associations, and the government. The declared standards typically include identifying customer needs, ensuring confidentiality, providing the desired cover, and handling claims promptly and fairly. Insurers also remind policyholders and intermediaries of their obligations, such as disclosure requirements and premium payments. Therefore, statements I and II are correct.

In general insurance practices in Hong Kong, insurers are not legally obligated to remind policyholders about upcoming renewal dates. The responsibility lies with the insured to take action. If no action is taken, the policy simply lapses at the end of the coverage period; this is not considered a cancellation, which implies premature termination.

Cancellation of an insurance contract requires specific terms allowing it, or mutual consent, as there is no automatic right to cancel. Most general insurance policies include a cancellation clause that outlines the conditions under which either the insurer or the insured can cancel the policy.

Insurers may cancel a policy by providing notice to the insured, typically with a seven-day advance notice sent by registered mail to the insured’s last known address, along with a pro-rata refund of the premium. Insured parties can also cancel, usually with immediate effect, and are entitled to a short-period refund of the premium, unless a claim has been made during the current insurance period.

Insurers rarely invoke the cancellation clause, but may do so in cases of suspected fraud or disastrous loss experience. Neither party is generally required to state the reason for invoking the cancellation clause, as it is considered a right, not a conditional privilege. Therefore, statements I and II are correct.

A deductible, also known as an excess, is a specified amount that the insured must pay out-of-pocket before the insurance company will cover the remaining costs. It helps to eliminate small claims and reduce the premium. A franchise, on the other hand, stipulates that if a loss is below a certain amount, the insured bears the entire loss; however, if the loss exceeds that amount, the insurer pays the entire loss. Warranties are absolute undertakings by the insured, and a breach of warranty can discharge the insurer’s liability. Conditions in insurance can refer to either policy conditions or contract conditions, with contract conditions being fundamental terms of the contract. Therefore, only the statement about deductibles is accurate.

In Personal Accident (PA) insurance, the premium calculation is primarily based on the insured’s occupation, which is classified into risk classes. While individual features may have underwriting consequences, occupation is the standard basis. Sums insured are technically unlimited due to unlimited insurable interest, but insurers may limit coverage to normal requirements. Group policies are increasingly offered as fringe benefits, and sickness cover, though traditionally linked, is now less common in Hong Kong PA policies, which are typically ‘Accidents Only’ policies. PA policies are usually annual contracts that may be cancelled by the insurer. Therefore, statements I and II are correct.

Customer service standards are vital for insurance companies in Hong Kong. These standards, often declared publicly, reflect a company’s commitment to quality, professional ethics, and fair claims handling. They are monitored not only internally but also by policyholders, industry associations, and the government to ensure transparency and ethical conduct. Internal audit personnel monitor the commitments expressed in the policy statement. Companies take this responsibility very seriously, because any lapse of declared standards is important. Also, discovery and correction “in-house ” is always preferable to the embarrassment and other consequences of public examination. Therefore, statements I and II are correct.

Rebating in general insurance, without the insured’s explicit written consent, is viewed as a practice that undermines fair competition and the integrity of commission structures. It can be seen as a form of bribery or corruption because it distorts the true cost of insurance and can unduly influence the insured’s decision-making process. The Model Agency Agreement and the Code of Practice for the Administration of Insurance Agents both address this issue to maintain ethical standards within the industry. Customer service is a key concern for individual companies, central insurance associations, and the Hong Kong Government, as it encompasses courtesy, business ethics, and the efficiency of business operations. The Insurance Companies Ordinance sets out specific requirements for insurance companies in Hong Kong, including authorization and capital requirements. Therefore, statements I, II and III are correct.

The Code of Conduct for Insurers, as it relates to the HK IIQE exam, sets forth the standards of good insurance practice expected of insurers in several key areas. These areas include underwriting and claims handling, ensuring fairness and efficiency in these core insurance functions. It also emphasizes customers’ rights and obligations, promoting transparency and understanding between insurers and policyholders. Furthermore, it extends to customers’ rights and interests generally, requiring insurers to act in the best interests of their customers. Lastly, it covers the industry’s public image as a good corporate citizen, encouraging insurers to contribute positively to society and maintain ethical standards. Therefore, all of the above statements are correct.

A Certificate of Insurance serves different purposes depending on the context. In the case of compulsory insurance like motor insurance, it acts as formal confirmation that the required insurance is in place. It’s a permanent document, separate from the full policy wording. Alternatively, it can also be used to confirm coverage under a master policy, such as in travel or marine cargo insurance, providing evidence of the insurance arrangements. Understanding the role of a Certificate of Insurance in different insurance scenarios is important for the IIQE Paper 2 exam.

A ‘Scheduled Policy Form’ is a common policy structure that includes a policy schedule, detailing the specifics of the coverage. The ‘Signature Clause,’ also known as the ‘Attestation Clause,’ is the section where the insurer confirms their obligations under the contract by signing. ‘Settling Agents’ are representatives named in marine cargo policies who are authorized to investigate claims and, in some instances, settle claims on behalf of the insurer. Therefore, statements I, II and III are correct.

The Insurance Companies Ordinance (ICO) in Hong Kong sets out several requirements for insurance companies to ensure their financial stability and viability. These include authorization of insurers, capital requirements, solvency margin requirements, ‘fit and proper’ directors and controllers, and ‘adequate’ reinsurance. These requirements are designed to protect policyholders and maintain the integrity of the insurance market. The Code of Conduct for Insurers, introduced by The Hong Kong Federation of Insurers (HKFI), focuses on standards of good insurance practice, advising and selling practices, claims handling, management of insurance agents, and handling inquiries, complaints, and disputes. The Code of Practice for the Administration of Insurance Agents, issued in accordance with the ICO and approved by the Insurance Authority (IA), deals with interpretation, general principles, rules, procedures, fit and proper criteria, and minimum requirements of Model Agency Agreement. Therefore, statements I, II and III are correct.

A ‘system of check’ in fidelity guarantee insurance refers to the internal controls and discipline an employer implements to oversee guaranteed staff. This is crucial for mitigating risks associated with employee dishonesty. Trend adjustment is used in business interruption claims to account for external factors unrelated to the insured event. Transparency in insurance ensures the public is informed about relevant matters, promoting fairness. Unoccupancy clauses in household insurance policies suspend coverage if a property is vacant for an extended period. Therefore, statements I, II and III are correct.

In motor insurance, a voluntary excess is an amount the insured agrees to pay in the event of a claim, in addition to any other excess that might apply. By accepting a voluntary excess, the insured typically receives a discount on their insurance premium. This arrangement allows policyholders to lower their upfront costs in exchange for bearing a greater financial responsibility if an incident occurs. This is aligned with general insurance principles and risk management strategies within the HK IIQE syllabus.

The Schedule in a scheduled policy form is a critical component that contains specific details related to the insured risk. It includes information such as the policy number, insured’s details, policy limits, effective dates, description of the insured subject matter, premium, insurance intermediary’s identity, special terms, extra benefits, and endorsements. Understanding the contents of the Schedule is essential for determining the scope and terms of the insurance coverage. Therefore, identifying the Schedule as the section containing details specific to the insured risk is the correct understanding.

In the context of ‘All Risks’ insurance for valuable items like jewelry and antiques, an agreed value policy stipulates that in the event of a total loss, the insurer will pay the sum insured (or agreed value) regardless of the item’s actual market value at the time of the loss. This differs from strict indemnity, which aims to compensate the insured for the actual loss sustained. However, it’s crucial to note that for partial losses, the principle of strict indemnity typically applies, meaning the compensation will be based on the actual loss incurred, not the agreed value. This type of policy is beneficial for items whose values are subjective or fluctuate significantly, providing certainty in the event of a total loss. This is aligned with the principles of property insurance as it applies in Hong Kong.

Insurance brokers in Hong Kong must adhere to specific ‘minimum requirements’ set by the Insurance Authority. These requirements are designed to ensure the integrity and stability of the insurance market and protect the interests of clients. Among these requirements are qualifications and experience, capital and net assets, professional indemnity insurance, keeping of separate client accounts, and keeping proper books and accounts. Additionally, brokers must be ‘fit and proper’ for their role, and bodies of insurance brokers must have rules to ensure their members meet this standard. Failing to meet these requirements can lead to disciplinary actions and undermine the public’s trust in the insurance industry. Therefore, maintaining adequate professional indemnity insurance is a mandatory requirement for insurance brokers in Hong Kong, as specified by the Insurance Authority.

In commercial insurance, particularly for fire, theft, and consequential loss, maintaining thorough records is essential for verifying losses, as insurers often require this documentation. For marine insurance claims, key documents include the survey report, original policy, and bill of lading. Medical reports are necessary to support claims for incapacity under Personal Accident (PA) policies, and these are typically at the insured’s expense. Expenses for medical examinations of injured employees, if instigated by the employer, are covered under the EC Ordinance and subsequently by the insurer. Insurers usually handle witness statements and police reports. Surveyors are crucial in marine loss assessments, providing independent investigations into the cause and extent of losses. Loss adjusters, engaged mainly for property and liability claims, act as independent experts offering impartial advice, with their fees potentially based on the claim settlement amount. Engineers offer specialist advice on technical issues, especially in Engineering, Contractors’ All Risks, or Liability insurances. Settling agents, often named in marine cargo policies, have the authority to settle claims on behalf of the underwriter in areas without the underwriter’s direct presence. Survey agents are specified by marine cargo underwriters to conduct damage surveys at the destination, ensuring proper assessment of losses. Understanding the roles and responsibilities of these professionals is crucial in the claims process within the insurance industry in Hong Kong, as governed by IIQE standards.

General Average (GA) refers to a principle in maritime law where losses resulting from a voluntary sacrifice or expenditure to save a common venture (ship and cargo) during a peril are shared proportionally by all parties involved. A GA act must be extraordinary, voluntary, and reasonably made in a time of peril to preserve the property. The party incurring the GA loss is entitled to a contribution from the other parties who benefited from the act. This contribution is subject to maritime law conditions, including that the GA act must have been successful in preventing a total loss. Marine insurance policies typically cover liabilities for GA contributions. In the context of the HK IIQE exam, understanding the principles of GA, including what constitutes a GA act, the conditions for contribution, and the role of marine insurance, is crucial. Salvage, on the other hand, refers to the compensation paid to those who save a vessel or cargo from perils at sea. Sue and Labour charges are expenses incurred by the insured to prevent or minimize a loss. Actual Total Loss refers to situations where the insured property is destroyed or irretrievably lost. Therefore, the scenario described fits the definition of a General Average act.

The Motor Insurers’ Bureau of Hong Kong (MIB) is a crucial entity established to ensure the fulfillment of compulsory motor insurance objectives, particularly when insurance is either unavailable or ineffective. It is funded through a levy imposed on motor insurance premiums. Membership is mandatory for all authorized motor insurers operating in Hong Kong, as per regulatory requirements. This arrangement ensures that victims of road accidents involving uninsured or untraced drivers can still receive compensation, thereby upholding the intent of compulsory motor insurance as mandated by the Motor Vehicles Insurance (Third Party Risks) Ordinance.

Contractors’ All Risks insurance provides coverage for physical loss or damage to the contract works, construction plant, equipment, and machinery. Section II of this policy extends to cover the insured’s legal liability for third-party injury or property damage arising from the construction work. However, this section typically excludes liability for loss or damage to property belonging to the insured, such as the work covered under Section I of the policy. Additionally, it often excludes liability related to the weakening or removal of support to other buildings, although this exclusion can sometimes be removed for an additional premium. Employers’ Liability Insurance, as provided by the Employees’ Compensation (EC) policy in Hong Kong, covers the legal liabilities of the employer towards their employees, including liabilities under the Employees’ Compensation Ordinance for injuries or death caused by accidents arising out of and in the course of their employment. This liability is strict, meaning it does not depend on fault on the part of the employer. Liability insurance policies can be written on either a ‘claims-made’ or a ‘claims-occurring’ basis. ‘Claims-made’ policies cover claims made during the policy period, while ‘claims-occurring’ policies cover events that occur during the policy period, regardless of when the claim is made. All liability insurances are ‘long-tail’ in nature, meaning claims may arise and develop over a long period of time, even years after the policy expires. This requires insurers to keep relevant files and claims reserves open for much longer compared to ‘short-tail’ business like property insurances.

In general insurance, particularly in motor insurance policies in Hong Kong, the principle of indemnity aims to restore the insured to the financial position they were in immediately before the loss, without allowing them to profit from the loss. When a vehicle is repaired using new parts, betterment occurs if the new parts improve the vehicle’s condition beyond its pre-accident state. Insurers may request the insured to contribute to the cost of betterment, reflecting the increased value of the vehicle post-repair. The depreciation rate applied should be reasonable and reflect the vehicle’s age and condition. The policy’s exclusions, such as depreciation, also play a role in determining the insured’s responsibility for betterment contributions. According to the case provided, the Complaints Panel ruled that the insurer’s claim decision was appropriate and the insured should be responsible for a 35% betterment contribution.

Statement I is correct because the principle of indemnity seeks to restore the insured to their pre-loss financial position, not to provide a windfall. Statement II is also correct because betterment refers to the improvement in value or condition of the insured property after repairs, compared to its state before the loss. Statement III is incorrect because the insured may be required to contribute to the cost of betterment, as it represents an improvement beyond indemnity. Statement IV is incorrect because the depreciation rate should be reasonable and reflect the vehicle’s age and condition, not necessarily be universally accepted. Therefore, statements I and II are correct.

When assessing the validity of an insurance claim, several factors are considered. These include whether the premium was paid as required, whether the cause of loss is covered by the policy (peril considerations), and whether any policy exclusions apply. The insured must prove the loss falls within the operative clause, especially in ‘specified perils’ cover. The insurer typically bears the responsibility of proving that an exclusion applies. Insurable interest is a critical implied contract term. The insured is responsible for proving the amount of the loss. Public policy considerations can also invalidate a claim. Notification to the insurer should be made as soon as possible.

Statement I is correct because premium payment before policy commencement or during the days of grace is a prerequisite for coverage.
Statement II is correct because the insured must prove that the loss falls within the operative clause of the policy.
Statement III is incorrect because it is normally the insurer’s responsibility to prove that an exclusion applies, not the insured’s.
Statement IV is incorrect because it is the insured’s responsibility to prove the amount of the loss, not the insurer’s. Therefore, statements I and II are correct.

In situations where a vehicle is repaired using new parts, and those parts enhance the vehicle’s value beyond its pre-accident condition, the principle of indemnity suggests that the insured should contribute to the betterment. This contribution reflects the improved condition of the vehicle post-repair. The depreciation rate applied should be reasonable, considering factors like the vehicle’s age and mileage. If the policy excludes depreciation coverage, the insured may be responsible for a betterment contribution. This aligns with the principle of indemnity, which aims to restore the insured to their pre-loss financial position without providing undue gain. The assessment of a reasonable depreciation rate is complex and lacks a universally accepted calculation method, making it a contentious issue. This question relates to Section 1/8 of the IIQE Paper 2 General Insurance Examination syllabus, specifically focusing on the insured’s responsibility for betterment contributions in vehicle insurance claims.

Forcible and violent entry or exit is a standard requirement for valid claims under commercial theft insurance, indicating that the theft must involve visible signs of forced entry or exit. A ‘Hold-Up’ cover extends a theft policy to include theft accompanied by violence or the threat of violence. Fraud involves dishonest attempts to cheat, such as providing false information when arranging insurance or making dishonest claims, potentially leading to policy termination and forfeiture of benefits. General exceptions are policy limitations that apply to every part of the policy.

Statement I is correct because forcible entry or exit is a standard requirement for theft claims.
Statement II is incorrect because a ‘Hold-Up’ cover specifically includes violence or threat of violence, not just any theft.
Statement III is incorrect because fraud, if proven, allows the insurer to terminate the policy and forfeit benefits.
Statement IV is correct because general exceptions are policy limitations that apply across the entire policy. Therefore, statements I and IV are correct.

In insurance, policy conditions define the rights, duties, and relationships between the insurer and the insured. These conditions are classified based on their time of operation: conditions precedent to the contract (must be met for the contract to start), conditions subsequent to the contract (events that, if occurring, require notification and agreement), and conditions precedent to liability (breach invalidates a specific claim, not the entire contract). Representations are statements made by one party to another that influence the risk being insured and must be substantially true and material to the risk. Exclusions are policy provisions that specify circumstances under which coverage does not apply, including general exclusions applicable to all policies within a class (e.g., wear and tear in ‘all risks’ insurance) and specific exclusions tailored to individual policies based on extra hazards. Therefore, statements I and II are correct.

Insurers’ commitment to customer service involves multiple facets. It includes identifying customer needs by offering suitable insurance products, maintaining confidentiality, providing the desired coverage, ensuring prompt delivery of insurance documents, and handling claims fairly. Insurers also remind policyholders and intermediaries of their obligations, such as disclosure requirements, premium payments, and adherence to the Code of Practice. Internal audits monitor the commitments, and external monitoring is conducted by policyholders, industry associations, and the Government. Transparency is crucial, requiring legally and ethically justifiable conduct and practices.

Deductibles in Directors and Officers (D&O) insurance are typically applied to each insured director or officer, potentially with an aggregate deductible for all claims during the insurance period. The policy is usually written on a claims-made basis, meaning it covers claims made during the policy period, regardless of when the event occurred. Public Liability (PL) insurance covers liabilities for death, injury, or property damage not covered by specialized policies. PL policies usually operate on a claims-occurring basis, covering claims arising from accidents during the policy year, even if the claim is made later. Premiums for PL insurance can be adjustable based on factors like wages or turnover, although non-adjustable premiums are also common. Marine insurance uses the term ‘average’ to refer to partial loss, with ‘particular average’ denoting partial loss affecting the insured subject matter, excluding general average loss.

Conditions within an insurance policy outline the obligations and rights of both the insurer and the insured. These conditions are categorized based on their operational timing. A ‘condition precedent to the contract’ must be met for the policy to initiate. A ‘condition subsequent to the contract’ requires notification and agreement upon occurrence during the policy term. A ‘condition precedent to liability’ invalidates specific claims if breached, without nullifying the entire contract. Representations are statements made by the insured that influence the risk assessment; they must be substantially true and material to the risk. Exclusions define circumstances where the policy does not provide coverage. General exclusions apply across all policies within a class, while specific exclusions are tailored to individual policies based on unique hazards. Therefore, statements I and II are correct.

In situations where an insured party opts for a voluntary excess on their insurance policy, particularly in motor insurance, it’s typically done to lower the premium. This excess is applied in addition to any other excesses already present in the policy. Therefore, the premium is reduced due to the insured agreeing to bear a larger portion of any potential claim. This concept is important for understanding risk management and cost-saving strategies within insurance policies, as it relates to the IIQE Paper 2 General Insurance Examination.