hk-iiqe-paper-5 common mistakes
hk-iiqe-paper-5 · Understand the traps and how to avoid them.
Treating an investment-linked policy as a pure fund purchase and ignoring that the death benefit is a multiple of account value (often 101%–105%), so the policyholder bears nearly all investment risk while the insurer's protection element is minimal.
Candidates transfer mutual-fund knowledge from Paper 1 or SFC licensing study and assume the ILAS wrapper adds meaningful insurance protection, when in fact most ILAS products are savings/investment vehicles with only a nominal sum assured.
What to do instead
For every product, state the death benefit formula explicitly (e.g. higher of account value and 101% of account value, or a fixed percentage of premiums paid), then explain in one sentence what that means for risk allocation between insurer and policyholder. Practise writing this out for three product types: single-premium, regular-premium, and guaranteed-minimum-death-benefit variants.
Describing the investment choices as 'a range of funds managed by the insurer' without distinguishing underlying funds, sub-funds, umbrella fund structures, and the insurer's own pooled investment accounts, or without explaining that the policyholder's premiums are allocated to units of these funds.
The terminology in ILAS documentation (units, allocation, bid/offer price, umbrella funds) overlaps with SFC-authorised fund language, and candidates memorise product brochures without understanding the unit-linked mechanics.
What to do instead
Build a one-page diagram: premium → net premium after charges → units purchased at offer price → account value = units × bid price. Label where each charge bites. Then list the three common structures (insurer's pooled fund, SFC-authorised fund, fund-of-funds) and one implication of each for valuation frequency and pricing transparency.
Reciting that asset allocation should match risk profile but failing to explain rebalancing, switching costs, or the effect of market movement on the policyholder's actual allocation drift over time.
Candidates learn the risk-profiling questionnaire as a compliance step rather than as an input to an ongoing allocation decision, so they cannot connect the profile to concrete allocation advice or to post-sale monitoring.
What to do instead
Work through a numerical example: a 60/40 portfolio after a 20% equity fall becomes roughly 55/45; state the rebalancing action, the switch charge that may apply, and whether a switch is free within the policy. Memorise the typical switch allowance (e.g. a number of free switches per year, then a percentage fee) and be able to quote it as a range rather than a single number.
Confusing the policy document, the product brochure, the investment choices booklet, the illustration, and the disclosure documents, and being unable to say which document contractually binds the insurer and which is merely promotional.
ILAS sales packs contain many overlapping documents, and candidates skim them for the exam rather than mapping each to its legal function.
What to do instead
Create a table with columns: document name, issuer, contractual or non-contractual, what it tells the client, and when it must be provided. Include the policy provisions, the product guide/offering document, the illustration with its guaranteed and non-guaranteed columns, the charges table, and the risk disclosure. Test yourself by naming the document that governs a disputed surrender value.
Quoting only the premium allocation percentages (e.g. 'first year 30%, second year 55%') as if they were the whole cost, and omitting policy fees, fund management charges, mortality and expense charges, surrender charges, and the effect of bid-offer spread.
Illustrations foreground allocation percentages, so candidates anchor on that single number and forget that total cost of the policy is the sum of several layers, some deducted at unit level rather than from premium.
What to do instead
For a sample regular-premium policy, compute total charges over the first five years by adding: allocation shortfall, policy fee, insurance charge, fund management charge as a percentage of account value, and surrender charge if exited early. Present the answer as both a dollar figure and a percentage of premiums paid, and state which charges reduce units and which reduce unit price.
Answering regulatory questions by citing the Insurance Ordinance alone, without distinguishing the roles of the Insurance Authority, the SFC authorisation of the underlying funds, and the conduct requirements for licensed insurance intermediaries selling ILAS products.
ILAS sits at the intersection of insurance and securities regulation, and candidates who study one regime in isolation miss the dual-authorisation point and the conduct standards that flow from it.
What to do instead
Write a short comparison: what the IA regulates (the insurer, the intermediary, the product as a long term insurance contract), what SFC authorisation of a fund does and does not mean (it is not a recommendation or a guarantee), and which conduct rules apply at the point of sale. Include the requirement that ILAS products may only be sold by licensed or registered intermediaries and the implications of mis-selling for the intermediary.
Treating the risk profiling questionnaire as a box to be completed after the product has been recommended, rather than as the document that determines whether the recommendation is suitable at all.
In practice, advisers sometimes complete paperwork retrospectively, and candidates absorb this habit rather than the correct sequence of know-your-client, then risk profile, then product match, then disclosure.
What to do instead
Memorise the sequence and be able to justify each step: collect financial situation, investment experience, objectives and risk tolerance; derive a profile; select products within that profile; document why the product fits; disclose charges and risks; confirm the client understands. Practise identifying the point of failure in short scenario descriptions, especially where a client asks for a product outside their assessed profile.
Believing a signed risk disclosure or a client's instruction to proceed cures an unsuitable recommendation, and therefore answering that the intermediary has no further obligation once the form is signed.
Candidates conflate documentary evidence of disclosure with the substantive suitability obligation, and the exam frequently tests whether paperwork alone discharges the duty.
What to do instead
State the principle plainly: disclosure and signed acknowledgements support but do not replace the suitability assessment; a recommendation must still be reasonable given the client's circumstances. Learn to explain what an intermediary should do when a client insists on an unsuitable product, including documenting the advice given and the client's decision, and the possible consequences of proceeding.
Assuming switching between funds is free and unrestricted, and being unable to describe how a switch is priced, when it takes effect, and what happens to the policy's insurance charges when the account value changes.
Switching feels like an administrative convenience, so candidates do not study the pricing mechanics or the free-switch allowance, and they forget that insurance charges are usually deducted by cancelling units.
What to do instead
Learn the switch process end to end: instruction, cut-off time and valuation point, number of free switches per year, charge thereafter, bid-offer spread on the switch, and the resulting unit statement. Then explain how a switch that reduces account value interacts with a mortality charge expressed as a percentage of the difference between sum assured and account value.
Describing surrender as simply 'cashing in the policy' without distinguishing surrender value from account value, explaining surrender charges that decline over time, or noting the tax and protection consequences of early termination.
Surrender is treated as a servicing transaction rather than a decision with a cost structure, and candidates do not connect the early-surrender charge schedule to the product's break-even period.
What to do instead
For a sample policy, plot account value and surrender value over ten years and identify the break-even year where surrender value first exceeds total premiums paid. Explain what happens to the protection element on surrender, what partial withdrawal does to the sum assured, and what the insurer must disclose to the client at the point of a surrender request.