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IIQE (HK) practice questions

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Question 1Role knowledge and relevant financial foundations

Which of the following best describes a 'pure risk' as used in insurance?

  1. A risk where there is a chance of loss or no loss, but no chance of gain Correct answer.
  2. A risk where there is a chance of either gain or loss
  3. A risk that can never be insured
  4. A risk that always results in a financial gain

Explanation

A pure risk involves only the possibility of loss or no loss, with no opportunity for gain - for example, the risk of a fire or accident. Insurance is generally concerned with pure risks because they are measurable and only the downside exists.

Question 2Role knowledge and relevant financial foundations

Insurance works mainly on the basis of which financial mechanism?

  1. Speculation by individual policyholders
  2. Pooling of similar risks contributed by many policyholders Correct answer.
  3. Government subsidy of all losses
  4. Lending money to those who suffer losses

Explanation

Insurance pools the contributions (premiums) of many policyholders exposed to similar risks, so the relatively few who suffer losses are compensated from the common fund. This spreads the financial impact of loss across the group.

Question 3Role knowledge and relevant financial foundations

Which term describes the cause or condition that may give rise to a loss, such as fire, theft or flood?

  1. Peril Correct answer.
  2. Hazard
  3. Premium
  4. Indemnity

Explanation

A peril is the actual cause of a loss, such as fire, theft or flood. It is distinct from a hazard, which is a condition that increases the likelihood or severity of a peril.

Question 4Role knowledge and relevant financial foundations

A building with old, faulty electrical wiring is an example of which type of hazard?

  1. Moral hazard
  2. Physical hazard Correct answer.
  3. Morale hazard
  4. Speculative hazard

Explanation

Faulty wiring is a physical hazard - a tangible condition of the property that increases the chance or severity of a fire loss. Physical hazards relate to the material features of the risk.

Question 5Role knowledge and relevant financial foundations

Which of the following is generally NOT one of the characteristics that make a risk insurable?

  1. The loss must be fortuitous (accidental)
  2. There must be a large number of similar exposures
  3. The loss must be certain to happen at a known time Correct answer.
  4. The financial value of the loss must be measurable

Explanation

Insurable risks must be fortuitous and uncertain; a loss that is certain to occur at a known time, such as ordinary wear and tear, is not insurable because there is no element of chance to pool. The other features - large numbers of similar exposures and measurable loss - support insurability.

Question 6Role knowledge and relevant financial foundations

An insurance contract is described as a contract of 'utmost good faith'. What does this primarily require?

  1. The insurer must pay all claims without investigation
  2. Both parties must disclose all material facts honestly Correct answer.
  3. The insured must pay premiums in advance only
  4. The contract must be witnessed by a solicitor

Explanation

Utmost good faith (uberrimae fidei) requires both parties, but especially the proposer, to disclose all material facts that would influence the insurer's decision to accept the risk and on what terms. This duty is higher than in ordinary commercial contracts.

Question 7Role knowledge and relevant financial foundations

A 'material fact' in insurance is best defined as a fact that:

  1. Only the insured considers important
  2. Would influence a prudent insurer in setting terms or accepting the risk Correct answer.
  3. Relates only to the premium amount
  4. Is always disclosed automatically by the insurer

Explanation

A material fact is one that would influence the judgement of a prudent insurer in deciding whether to accept a risk and on what terms. The proposer has a duty to disclose such facts under utmost good faith.

Question 8Role knowledge and relevant financial foundations

For a valid insurance contract, the proposer must normally have insurable interest. Insurable interest means the insured:

  1. Owns the insurance company
  2. Stands to suffer a financial loss if the insured event occurs Correct answer.
  3. Has paid at least two years of premiums
  4. Is related to the insurer's directors

Explanation

Insurable interest exists when the insured would suffer a genuine financial loss from the loss or damage of the subject matter, giving them a legally recognised relationship to it. Without insurable interest the contract is generally void.

Question 9Role knowledge and relevant financial foundations

In a property insurance contract, at what point must insurable interest generally exist?

  1. Only when the policy is first taken out
  2. Only at the time of loss
  3. Both when the policy is taken out and at the time of loss Correct answer.
  4. Insurable interest is not required for property insurance

Explanation

For most property and general insurance, insurable interest must exist both when the policy is effected and at the time of the loss, because the policy indemnifies an actual financial loss. (Life insurance differs, requiring interest only at inception.)

Question 10Role knowledge and relevant financial foundations

The principle of indemnity in insurance means that the insured should be:

  1. Placed in a better financial position after a loss
  2. Restored to the same financial position they were in before the loss Correct answer.
  3. Paid the full sum insured regardless of the actual loss
  4. Paid only half of any loss suffered

Explanation

Indemnity aims to restore the insured to the same financial position as immediately before the loss, no better and no worse. This prevents the insured from profiting from a claim.

Question 11Role knowledge and relevant financial foundations

Which type of insurance is generally NOT a contract of indemnity?

  1. Motor insurance
  2. Fire insurance
  3. Life insurance Correct answer.
  4. Marine cargo insurance

Explanation

Life insurance is not a contract of indemnity because the value of a human life cannot be precisely measured; instead a benefit policy pays an agreed sum. Property and liability policies such as motor, fire and marine are indemnity contracts.

Question 12Role knowledge and relevant financial foundations

Subrogation gives the insurer the right to:

  1. Recover from a third party who is legally responsible for the loss, after paying the claim Correct answer.
  2. Refuse all valid claims
  3. Cancel the policy after a claim
  4. Increase the premium retrospectively

Explanation

After indemnifying the insured, the insurer may step into the insured's legal rights and recover the loss from a negligent third party. Subrogation supports indemnity by preventing the insured from being paid twice.

Question 13Role knowledge and relevant financial foundations

The principle of contribution applies when:

  1. Only one policy covers a loss
  2. The same loss is covered by two or more indemnity policies Correct answer.
  3. A life policy and a fire policy are both in force
  4. The insured has no insurable interest

Explanation

Contribution applies when two or more indemnity policies cover the same interest, subject matter and peril. The insurers share the loss proportionally so the insured is not paid more than the actual loss.

Question 14Role knowledge and relevant financial foundations

Proximate cause is best described as:

  1. The most recent event before a loss, regardless of effect
  2. The dominant, effective cause that sets in motion the chain leading to the loss Correct answer.
  3. Any cause mentioned in the claim form
  4. The cause that is cheapest for the insurer

Explanation

Proximate cause is the active, efficient cause that sets in motion the chain of events producing the loss, without the intervention of a new independent cause. Cover depends on whether the proximate cause is an insured peril.

Question 15Role knowledge and relevant financial foundations

A fire weakens a building's structure and it later collapses in a storm the same night. Under proximate cause, the collapse is most likely treated as:

  1. An entirely separate uninsured loss
  2. Proximately caused by the fire, an insured peril Correct answer.
  3. Caused only by the storm and never covered
  4. An act of the insured

Explanation

If the fire so weakened the structure that collapse was the natural and probable consequence without a genuinely independent new cause, the fire remains the proximate cause and the loss is covered as a fire loss. The storm here is part of the unbroken chain rather than a new dominant cause.

Question 16Role knowledge and relevant financial foundations

Which body is the statutory regulator of the insurance industry and of insurance intermediaries in Hong Kong?

  1. The Hong Kong Monetary Authority
  2. The Insurance Authority Correct answer.
  3. The Securities and Futures Commission
  4. The Mandatory Provident Fund Schemes Authority

Explanation

The Insurance Authority (IA) is the independent statutory body that regulates insurers and insurance intermediaries in Hong Kong. It took over direct regulation of intermediaries from the former self-regulatory bodies in 2019.

Question 17Role knowledge and relevant financial foundations

Under the current regime, a person who wishes to carry on regulated activities as an insurance agent or broker in Hong Kong must:

  1. Simply register with their employer
  2. Hold a licence granted by the Insurance Authority Correct answer.
  3. Obtain approval from the Stock Exchange
  4. Pass a university degree in insurance

Explanation

Since the new regulatory regime took effect, all individual and business insurance intermediaries must be licensed by the Insurance Authority to carry on regulated activities. Licensing replaced the former registration with self-regulatory organisations.

Question 18Role knowledge and relevant financial foundations

Which legislation provides the principal legal framework for regulating the insurance business in Hong Kong?

  1. The Insurance Ordinance Correct answer.
  2. The Companies Ordinance
  3. The Banking Ordinance
  4. The Securities and Futures Ordinance

Explanation

The Insurance Ordinance (Cap. 41) is the principal legislation governing the regulation of insurers and insurance intermediaries in Hong Kong, administered by the Insurance Authority.

Question 19Role knowledge and relevant financial foundations

The 'cooling-off period' for a long-term life insurance policy in Hong Kong primarily allows the policyholder to:

  1. Increase the sum insured without underwriting
  2. Cancel the policy and get a refund of premium within a set period Correct answer.
  3. Avoid paying any premium for the first year
  4. Transfer the policy to another person freely

Explanation

The cooling-off period gives a new long-term policyholder a defined window (commonly 21 days) to reconsider and cancel the policy, receiving a refund of premiums paid, possibly subject to a market-value adjustment for investment-linked policies. It protects consumers from hasty decisions.

Question 20Role knowledge and relevant financial foundations

Which organisation in Hong Kong handles eligible monetary disputes between individual policyholders and insurers?

  1. The Insurance Complaints Bureau Correct answer.
  2. The Consumer Council only
  3. The District Court only
  4. The Hong Kong Federation of Insurers' marketing arm

Explanation

The Insurance Complaints Bureau (ICB) provides an independent mechanism to resolve eligible monetary disputes between individual policyholders and insurers, up to a set claim limit, without going to court. It helps consumers seek redress efficiently.

Question 21Role knowledge and relevant financial foundations

An insurance intermediary who deliberately misrepresents policy benefits to make a sale is most likely breaching which duty?

  1. The duty to act honestly, fairly and in the client's best interests Correct answer.
  2. The duty to maximise the insurer's profit
  3. The duty to avoid paying tax
  4. The duty to keep all information secret from the client

Explanation

Intermediaries must comply with conduct requirements to act honestly, fairly, with integrity and in the best interests of clients. Deliberate misrepresentation breaches these statutory and ethical conduct obligations and can lead to disciplinary action.

Question 22Role knowledge and relevant financial foundations

Anti-money-laundering obligations require an insurance intermediary handling a new long-term policy to primarily:

  1. Ignore the source of the client's funds
  2. Carry out customer due diligence and verify the client's identity Correct answer.
  3. Guarantee investment returns
  4. Pay claims in cash only

Explanation

Under anti-money-laundering and counter-terrorist-financing requirements, intermediaries and insurers must perform customer due diligence, including verifying the client's identity and, where relevant, understanding the source of funds. This helps detect and deter money laundering.

Question 23Role knowledge and relevant financial foundations

Which of the following is a core underwriting function of an insurance company?

  1. Advertising to the general public
  2. Assessing and selecting risks and deciding terms and premiums Correct answer.
  3. Auditing the government's accounts
  4. Managing the stock exchange

Explanation

Underwriting is the core function of assessing proposed risks, selecting which to accept, and setting appropriate terms, conditions and premiums. Sound underwriting keeps the risk pool balanced and the insurer solvent.

Question 24Role knowledge and relevant financial foundations

Reinsurance is best described as:

  1. Insurance bought by an insurer to transfer part of its risk to another insurer Correct answer.
  2. A discount given to policyholders for renewing
  3. Insurance that only covers reinstatement of buildings
  4. A government scheme covering all insurers' losses

Explanation

Reinsurance is insurance for insurers: the original (ceding) insurer transfers part of its accepted risk to a reinsurer. This spreads risk, increases capacity and protects the insurer against large or accumulated losses.

Question 25Role knowledge and relevant financial foundations

In the Hong Kong insurance market, the key difference between an insurance agent and an insurance broker is generally that:

  1. An agent represents the insurer while a broker represents the client Correct answer.
  2. A broker can never arrange general insurance
  3. An agent does not need a licence
  4. A broker is always an employee of one insurer

Explanation

An insurance agent generally acts for and represents one or more insurers, whereas an insurance broker acts on behalf of the client to arrange suitable cover from the market. Both must be licensed by the Insurance Authority.

Question 26Role knowledge and relevant financial foundations

An insurance broker arranging cover for a client should base recommendations primarily on:

  1. The product paying the highest commission
  2. The client's needs and the suitability of the cover Correct answer.
  3. The insurer that advertises the most
  4. The shortest policy document

Explanation

A broker acts in the client's interest and must recommend cover that suits the client's needs and circumstances. Putting commission ahead of suitability would breach conduct and ethical obligations.

Question 27Role knowledge and relevant financial foundations

Which document sets out the precise terms, conditions and scope of cover agreed between the insurer and the insured?

  1. The proposal form
  2. The insurance policy Correct answer.
  3. The advertising brochure
  4. The premium receipt

Explanation

The insurance policy is the formal contract document that sets out the agreed cover, terms, conditions, exclusions and the sum insured. It governs the rights and obligations of both parties.

Question 28Role knowledge and relevant financial foundations

The 'consideration' provided by the insured in an insurance contract is normally the:

  1. Premium Correct answer.
  2. Sum insured
  3. Claim payment
  4. Policy schedule

Explanation

In contract law, consideration is what each party gives. The insured's consideration is the premium, while the insurer's consideration is the promise to indemnify or pay benefits if an insured event occurs.

Question 29Role knowledge and relevant financial foundations

A condition precedent to liability in an insurance policy is a condition that:

  1. Has no effect on a claim
  2. Must be complied with before the insurer is obliged to pay a claim Correct answer.
  3. Only applies after the claim is paid
  4. Can be ignored by the insured at any time

Explanation

A condition precedent to liability must be satisfied before the insurer becomes liable to pay - for example, notifying a claim within a stated time. Breach can entitle the insurer to decline the claim.

Question 30Role knowledge and relevant financial foundations

Which of the following best describes the role of an actuary in an insurance company?

  1. Selling policies to the public
  2. Applying statistical and financial methods to assess risk, pricing and reserves Correct answer.
  3. Repairing damaged vehicles
  4. Investigating fire scenes

Explanation

An actuary uses statistical, mathematical and financial techniques to evaluate risk, set premium rates and calculate the reserves an insurer needs to meet future liabilities. This underpins pricing and solvency.

Question 31Role knowledge and relevant financial foundations

Which statement about the duty of disclosure for a consumer policyholder is most accurate?

  1. The consumer must disclose every fact, however trivial, or the policy is automatically void
  2. The consumer must take reasonable care to answer the insurer's questions honestly and accurately Correct answer.
  3. The insurer must discover all material facts itself with no duty on the consumer
  4. Disclosure is never required for general insurance

Explanation

For consumer insurance, the proposer should take reasonable care to answer the insurer's questions fully, honestly and accurately, providing material information. Insurers typically frame clear questions to elicit the facts they need.

Question 32Role knowledge and relevant financial foundations

A 'warranty' in an insurance policy is a term that the insured:

  1. May choose to ignore
  2. Promises to comply with, breach of which can affect the insurer's liability Correct answer.
  3. Uses to claim extra benefits
  4. Adds after a loss occurs

Explanation

A warranty is a promise by the insured that a certain state of affairs exists or will be maintained, such as keeping a fire alarm operational. Breach of warranty can entitle the insurer to refuse a related claim, depending on the policy and applicable law.

Question 33Role knowledge and relevant financial foundations

The 'sum insured' in a property policy generally represents the:

  1. Premium payable
  2. Maximum amount the insurer will pay for a covered loss Correct answer.
  3. Excess deducted from each claim
  4. Commission paid to the agent

Explanation

The sum insured is the maximum limit the insurer will pay for a covered loss under the policy. The insured should set it to reflect the true value at risk to avoid under-insurance.

Question 34Role knowledge and relevant financial foundations

Which of the following is an example of a 'morale hazard'?

  1. A locked, alarmed warehouse
  2. An insured leaving doors unlocked because they feel the insurance will cover any theft Correct answer.
  3. A sprinkler system in a factory
  4. A non-flammable building material

Explanation

Morale hazard is the carelessness or indifference to loss that arises because the person has insurance, such as not bothering to lock up. It increases the chance of loss through attitude rather than dishonesty.

Question 35Role knowledge and relevant financial foundations

Risk management techniques commonly include risk avoidance, risk reduction, risk retention and risk transfer. Buying insurance is mainly a form of:

  1. Risk avoidance
  2. Risk transfer Correct answer.
  3. Risk retention
  4. Risk creation

Explanation

Purchasing insurance transfers the financial consequences of a risk to the insurer in return for a premium, so it is a risk-transfer technique. Avoidance and reduction address the risk before it is transferred or retained.

Question 36Role knowledge and relevant financial foundations

An intermediary discovers after binding a policy that the client gave incorrect information that is material to the risk. The intermediary should:

  1. Keep quiet to protect the commission
  2. Inform the insurer and help correct the position Correct answer.
  3. Cancel the client's bank account
  4. Backdate the proposal form

Explanation

Acting honestly and in the client's and insurer's interests, the intermediary should ensure the correct material information reaches the insurer so the policy is placed on an accurate basis. Concealment could void cover and breach conduct rules.

Question 37Role knowledge and relevant financial foundations

Which of the following best describes 'average' as it applies to under-insured property policies (the principle of contribution by the insured)?

  1. The insurer pays the full loss regardless of under-insurance
  2. The claim is reduced in proportion to the under-insurance Correct answer.
  3. The premium is refunded in full
  4. The policy is automatically cancelled

Explanation

Where an average (under-insurance) condition applies and the sum insured is less than the value at risk, the insurer reduces the claim in the same proportion that the property is under-insured. This treats the insured as their own insurer for the uninsured portion.

Question 38Role knowledge and relevant financial foundations

A property is insured for HK$600,000 but its actual value at risk is HK$1,000,000. A partial loss of HK$200,000 occurs and the average condition applies. How much will the insurer pay?

  1. HK$200,000
  2. HK$120,000 Correct answer.
  3. HK$600,000
  4. HK$80,000

Explanation

Under average, payment = loss x (sum insured / value at risk) = 200,000 x (600,000 / 1,000,000) = HK$120,000. The insured bears the rest because the property was under-insured to 60% of value.

Question 39Role knowledge and relevant financial foundations

Which of the following is a key purpose of having a deductible (excess) in a general insurance policy?

  1. To increase the insurer's claims handling costs
  2. To remove small claims and reduce moral hazard, lowering premiums Correct answer.
  3. To guarantee the insurer never pays a claim
  4. To replace the need for a sum insured

Explanation

A deductible removes small, frequent claims, reduces administration cost and gives the insured a financial stake in preventing loss, which mitigates moral hazard. This generally allows a lower premium.

Question 40Role knowledge and relevant financial foundations

An insurer's investment function is important because:

  1. Premiums are held and invested to help meet future claims and generate returns Correct answer.
  2. It allows the insurer to avoid paying claims
  3. It is required to sell shares to policyholders
  4. It replaces the need for reinsurance

Explanation

Insurers collect premiums before claims arise and invest these funds prudently to generate returns and ensure money is available to meet future liabilities. Investment income also supports competitive pricing.

Question 41Role knowledge and relevant financial foundations

Bancassurance refers to the distribution channel where insurance products are:

  1. Sold only by post
  2. Distributed through banks to their customers Correct answer.
  3. Issued by the central bank
  4. Sold exclusively online without intermediaries

Explanation

Bancassurance is the distribution of insurance products through banks, leveraging the bank's customer base and branches. It is an important channel in the Hong Kong market alongside agents and brokers.

Question 42Role knowledge and relevant financial foundations

Which of the following would most likely be treated as a 'speculative risk' and therefore not normally insurable?

  1. Damage to a factory by fire
  2. Loss arising from a business gamble on a new product's market success Correct answer.
  3. Theft of office equipment
  4. Injury to an employee at work

Explanation

A business venture that could result in either profit or loss is a speculative risk and is generally not insurable, because insurance covers pure risks where only loss is possible. The other examples are pure risks that can be insured.

Question 43Role knowledge and relevant financial foundations

Under conduct requirements, before recommending a product an intermediary should ensure that the client receives:

  1. No information at all to keep the process quick
  2. Sufficient information about the product's features, risks and charges Correct answer.
  3. Only the marketing slogan
  4. A guarantee of profit

Explanation

Intermediaries must provide clients with adequate, accurate information so they can make an informed decision, including key features, risks, charges and any limitations. This is central to treating customers fairly.

Question 44Role knowledge and relevant financial foundations

Which of the following is the most accurate statement about the Insurance Authority's powers over intermediaries?

  1. It can only issue guidance with no enforcement
  2. It can license, supervise, inspect and discipline insurance intermediaries Correct answer.
  3. It can only regulate insurers, never intermediaries
  4. It reports to the Stock Exchange

Explanation

The Insurance Authority has statutory powers to license, supervise, inspect and take disciplinary action against insurance intermediaries who breach requirements. This direct regulatory role replaced the previous self-regulatory system.

Question 45Role knowledge and relevant financial foundations

An insured takes out two separate fire policies on the same building with two insurers, each for the full value. When a fire loss occurs, the principle of contribution means the insured will:

  1. Collect the full loss from both insurers and keep the surplus
  2. Recover the actual loss once, shared between the insurers Correct answer.
  3. Recover nothing because of double insurance
  4. Recover only from the cheaper policy

Explanation

Contribution prevents the insured from recovering more than the actual loss. The insurers share the single loss between them in proportion to their cover, so the insured is indemnified once, not twice.

Question 46Role knowledge and relevant financial foundations

Which of the following best describes the function of claims handling in an insurance company?

  1. Marketing new products to clients
  2. Investigating, assessing and settling valid claims fairly and promptly Correct answer.
  3. Setting the company's share price
  4. Recruiting new agents

Explanation

Claims handling involves verifying that a claim is covered, assessing the amount payable and settling valid claims fairly and promptly while guarding against fraud. Good claims service is central to an insurer's reputation.

Question 47Role knowledge and relevant financial foundations

A 'representation' made by a proposer differs from a 'warranty' in that a representation:

  1. Must be exactly and literally true in every detail or the policy is void
  2. Need only be substantially true on material matters Correct answer.
  3. Has no relevance to the contract
  4. Is always made after the loss

Explanation

A representation is a statement that induces the contract and must be substantially true in material respects. A warranty, by contrast, traditionally must be strictly and literally complied with.

Question 48Role knowledge and relevant financial foundations

Which is a recognised benefit of insurance to society as a whole?

  1. It guarantees that no losses ever occur
  2. It provides peace of mind, supports trade and helps economic stability Correct answer.
  3. It removes the need for any risk management
  4. It makes all activities risk-free

Explanation

Insurance provides peace of mind, enables businesses to take on ventures by transferring risk, supports lending and trade, and helps the economy recover after losses. It complements, rather than replaces, good risk management.

Question 49Role knowledge and relevant financial foundations

If an intermediary receives a gift or benefit from an insurer that could influence their advice to clients, the most appropriate ethical action is to:

  1. Accept it secretly and continue as normal
  2. Manage and, where required, disclose the potential conflict of interest Correct answer.
  3. Always refuse to deal with that insurer again
  4. Pass the gift directly to the client

Explanation

Intermediaries must identify, manage and, where appropriate, disclose conflicts of interest so that advice remains in the client's best interests. Transparency about inducements protects the client and preserves trust.

Question 50Role knowledge and relevant financial foundations

Why is the 'law of large numbers' important to an insurer?

  1. It guarantees a profit on every policy
  2. It makes the average loss more predictable as the number of similar risks increases Correct answer.
  3. It removes the need to set premiums
  4. It applies only to life insurance

Explanation

As the number of similar, independent exposures grows, the actual loss experience tends to approach the expected average, making losses more predictable. This statistical principle underpins premium calculation and pooling.