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NZ CFS L5 General Insurance study materials
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NZ CFS L5 General Insurance practice questions

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Question 1Regulatory, legal and ethical framework for financial services

What is the main regulatory function of the Code of Professional Conduct for Financial Advice Services in New Zealand?

  1. It sets the minimum solvency capital that general insurers must hold.
  2. It sets the maximum commission payable to insurance intermediaries.
  3. It sets the formula insurers must use to price natural hazard cover.
  4. It sets minimum competence, conduct and client-care standards for regulated financial advice. Correct answer.

Explanation

The Code of Professional Conduct for Financial Advice Services is made under the Financial Markets Conduct Act 2013. It sets the minimum standards of competence, ethical conduct and client care that financial advice providers, financial advisers and nominated representatives must meet. It does not set insurer solvency, commission caps or premium formulas.

Question 2Regulatory, legal and ethical framework for financial services

A general insurer is a member of the Insurance Council of New Zealand. Which set of standards must it follow when dealing with policyholders and claimants?

  1. The Fair Insurance Code. Correct answer.
  2. The Financial Markets Conduct Regulations 2014.
  3. The Code of Professional Conduct for Financial Advice Services.
  4. The Reserve Bank of New Zealand Act 2021.

Explanation

The Fair Insurance Code is an industry code issued by the Insurance Council of New Zealand. Member insurers commit to fair treatment, clear communication and sound claims handling when dealing with policyholders and claimants. The other instruments have different regulatory roles.

Question 3Regulatory, legal and ethical framework for financial services

Under the Financial Services Legislation Amendment Act 2019, which arrangement is required before a business can give regulated financial advice to retail clients?

  1. Each individual adviser must hold a separate financial adviser licence from the FMA.
  2. Each client must sign a waiver acknowledging that no statutory duties apply.
  3. The business must hold or operate under a financial advice provider licence. Correct answer.
  4. The business must be registered as an insurer with the Reserve Bank of New Zealand.

Explanation

Under the Financial Services Legislation Amendment Act 2019, regulated financial advice to retail clients is given under a financial advice provider licence. Individual advisers and nominated representatives work under that provider rather than holding a separate FMA adviser licence. Insurer registration is separate, and statutory advice duties cannot be waived by client consent.

Question 4Regulatory, legal and ethical framework for financial services

An insurance adviser recommends a policy from Insurer A and will receive a commission from Insurer A. What does the Code of Professional Conduct require regarding that commission?

  1. Avoid disclosing the commission because it is paid by the insurer, not the client.
  2. Disclose the commission only when it exceeds the commission paid by Insurer B.
  3. Disclose the commission and the conflict before or when giving the advice. Correct answer.
  4. Disclose the commission only if the client asks for the amount in writing.

Explanation

A commission creates a conflict of interest that must be managed and disclosed. The client should receive clear disclosure of the commission and the conflict before or at the time the advice is given, so the advice can be assessed. Disclosure is not limited to client request or to a comparison with another insurer.

Question 5Regulatory, legal and ethical framework for financial services

An insurer's compliance officer reasonably suspects that a customer's premium payments are proceeds of crime. Under the Anti-Money Laundering and Countering Financing of Terrorism Act 2009, what is the required first step?

  1. Submit a suspicious activity report to the Financial Intelligence Unit. Correct answer.
  2. Notify the customer and ask for a written explanation.
  3. Report the matter to the Reserve Bank of New Zealand as prudential supervisor.
  4. Refund the premiums and close the policy immediately.

Explanation

A reporting entity that reasonably suspects money laundering or terrorist financing must report it to the Financial Intelligence Unit, which is part of the New Zealand Police. Tipping off the customer is prohibited, so the insurer should not alert them. The Reserve Bank is the prudential supervisor, not the recipient of suspicious activity reports.

Question 6Regulatory, legal and ethical framework for financial services

A policyholder's claim is declined and the insurer's internal review upholds the decline. What access to dispute resolution is the policyholder entitled to under the New Zealand insurance regulatory framework?

  1. Require the Reserve Bank of New Zealand to review the claim decision.
  2. Ask the Financial Markets Authority to award compensation for the declined claim.
  3. Refer the complaint to an approved dispute resolution scheme at no cost. Correct answer.
  4. Take the complaint only to the courts, because insurance claims are outside dispute schemes.

Explanation

Insurers must be members of an approved dispute resolution scheme, and consumers can usually access the scheme free of charge after the insurer's internal complaint process. The scheme can consider the claim decision and may make a binding award within its limits. The FMA and Reserve Bank do not award compensation for individual claim disputes.

Question 7Regulatory, legal and ethical framework for financial services

An insurer wants to charge a higher premium to applicants over 65 for travel insurance. Under the Human Rights Act 1993, when is this age-based difference lawful?

  1. When every applicant over 65 is charged the same higher premium without exception.
  2. When it is based on actuarial or statistical data and is reasonable in the circumstances. Correct answer.
  3. When the applicant agrees to the higher premium in the application form.
  4. When the insurer states the age limit clearly in the policy wording.

Explanation

The Human Rights Act 1993 prohibits discrimination on grounds including age, but insurance has a limited exception. A difference in treatment is lawful if it is based on actuarial or statistical data, or other relevant information, and is reasonable in the circumstances. Disclosure or client consent alone does not satisfy that test.

Question 8Regulatory, legal and ethical framework for financial services

Which New Zealand regulator is responsible for the prudential supervision of general insurers, including solvency standards under the Insurance (Prudential Supervision) Act 2010?

  1. The Financial Markets Authority.
  2. The Financial Dispute Resolution Service.
  3. The Reserve Bank of New Zealand. Correct answer.
  4. The Insurance Council of New Zealand.

Explanation

The Reserve Bank of New Zealand is the prudential regulator for insurers under the Insurance (Prudential Supervision) Act 2010. It licenses insurers and monitors solvency and related prudential standards. The FMA is responsible for market conduct, ICNZ is an industry body and FDRS handles disputes.

Question 9Regulatory, legal and ethical framework for financial services

An insurer holds a claimant's medical report obtained for assessing a claim. It now wants to use that report to market health-related products. Under the Privacy Act 2020, what is the key requirement?

  1. The insurer may use it freely because the claimant is already a customer.
  2. The insurer may use it if the report is more than 12 months old.
  3. Use is allowed only if the new purpose is compatible or the claimant authorises it. Correct answer.
  4. The insurer may use it only after deleting the claimant's name and address.

Explanation

Information Privacy Principle 10 limits the use of personal information to the purpose for which it was collected unless an exception applies. A compatible purpose or the claimant's authorisation can permit the new use. Being an existing customer, ageing the report or merely removing identifying details does not automatically authorise marketing use.

Question 10Regulatory, legal and ethical framework for financial services

Under the Insurance Law Reform Act 1977, when can an insurer avoid a general insurance contract because the insured made an incorrect statement before the policy was issued?

  1. Only if the statement was material and induced the insurer to enter the contract. Correct answer.
  2. Only if the incorrect statement was written in the proposal form rather than given orally.
  3. Only if the insurer discovers the error within 30 days of issuing the policy.
  4. Only if the statement was incorrect, regardless of whether it affected the insurer's decision.

Explanation

The Insurance Law Reform Act 1977 limits an insurer's ability to avoid a contract for a pre-contractual misstatement. Avoidance generally requires that the statement was material and induced the insurer to enter the contract, meaning the insurer would not have entered or would have done so on different terms. Neither the form of the statement nor a 30-day discovery period is the test.

Question 11Regulatory, legal and ethical framework for financial services

A New Zealand business wants to start giving regulated financial advice about general insurance policies to retail clients. Which Act requires the business to hold a financial advice provider licence from the Financial Markets Authority before it can do so?

  1. Financial Service Providers (Registration and Dispute Resolution) Act 2008
  2. Financial Advisers Act 2008 (as amended by the Financial Services Legislation Amendment Act 2019) Correct answer.
  3. Insurance (Prudential Supervision) Act 2010
  4. Financial Markets Conduct Act 2013

Explanation

The Financial Services Legislation Amendment Act 2019 amended the Financial Advisers Act 2008 and introduced the financial advice provider licensing regime, which took effect on 15 March 2021. A business giving regulated financial advice must hold an FAP licence from the FMA; registration on the FSP Register is a separate requirement.

Question 12Regulatory, legal and ethical framework for financial services

An insurer's claims team collects a claimant's medical history directly from the claimant. Under the Privacy Act 2020, which obligation applies at the point of collection?

  1. Send a copy of the information to the Financial Markets Authority
  2. Retain the information indefinitely so future claims can be assessed
  3. Obtain a fresh consent for every item of information from every family member
  4. Tell the claimant why the information is being collected and who it may be disclosed to Correct answer.

Explanation

Information privacy principle 3 requires an agency collecting personal information directly from the individual to take reasonable steps to make the individual aware of the collection purpose, the intended recipients, and the consequences of not providing it. The Privacy Act does not require FMA notification or indefinite retention for claims.

Question 13Regulatory, legal and ethical framework for financial services

Under the Code of Professional Conduct for Financial Advice Services, which standard directly requires an adviser to tell a client about commission received from an insurer?

  1. Information disclosure Correct answer.
  2. Competence
  3. Ethical behaviour
  4. Client care

Explanation

The information disclosure standard in the Code requires advisers to disclose fees, commissions, and other incentives that could influence the advice. Ethical behaviour and conflicts of interest standards also apply, but the direct duty to tell the client about commission sits in information disclosure.

Question 14Regulatory, legal and ethical framework for financial services

A financial adviser holds a 20% shareholding in an insurer and recommends that insurer's policy to a client. What does the Code require the adviser to do about the shareholding?

  1. Refuse to give any advice on that insurer's products
  2. Transfer the shares to a family trust before giving advice
  3. Disclose the shareholding and manage the conflict in the client's interests Correct answer.
  4. Obtain prior approval from the Financial Markets Authority

Explanation

The Code's conflicts of interest standard requires advisers to identify conflicts, disclose them to the client, and manage them so the client's interests are protected. It does not generally ban shareholdings or require FMA approval for each conflict.

Question 15Regulatory, legal and ethical framework for financial services

A financial adviser is asked to advise on a class of commercial insurance they have not previously arranged. What does the Code's competence standard require before they give that advice?

  1. Decline to advise on the product permanently
  2. Rely on the insurer's product brochure as sufficient knowledge
  3. Ask the client to read the policy wording and make their own choice
  4. Obtain and maintain the competence needed to give the advice Correct answer.

Explanation

The competence standard requires an adviser to have and maintain the knowledge, skills, and experience needed for the advice, including keeping up with product changes. If competence is lacking, the adviser must not give the advice until it is acquired or should refer the client to someone competent.

Question 16Regulatory, legal and ethical framework for financial services

An insurer is about to start a new business relationship with a customer who wants a general insurance policy. Under the Anti-Money Laundering and Countering Financing of Terrorism Act 2009, what must the insurer do?

  1. Report the customer to the Financial Intelligence Unit before issuing the policy
  2. Obtain a credit check from a credit reporting agency
  3. Notify the Financial Markets Authority of every new customer
  4. Conduct customer due diligence before establishing the relationship Correct answer.

Explanation

As a reporting entity under the AML/CFT Act 2009, an insurer must conduct customer due diligence before establishing a business relationship, including verifying identity and understanding the purpose of the relationship. Suspicious activity reporting is triggered by suspicion, not by every new customer.

Question 17Regulatory, legal and ethical framework for financial services

An insurer's advertisement says every claim is 'paid, no questions asked', but the policy contains significant exclusions. Which regulatory framework makes misleading representations of this kind unlawful?

  1. Human Rights Act 1993
  2. Insurance Law Reform Act 1977
  3. Financial Markets Conduct Act 2013 fair dealing provisions Correct answer.
  4. Privacy Act 2020

Explanation

The fair dealing provisions of the Financial Markets Conduct Act 2013 prohibit misleading or deceptive conduct in relation to financial products and services, including insurance advertising. The Fair Trading Act 1986 also prohibits misleading conduct, but the option naming the FMCA is the financial-services-specific framework.

Question 18Regulatory, legal and ethical framework for financial services

Under the Code of Professional Conduct, what is the minimum period a financial advice provider must keep records of the financial advice given to clients?

  1. Two years
  2. Seven years Correct answer.
  3. Five years
  4. Ten years

Explanation

The Code's records standard requires financial advice providers to keep records of the advice given for at least seven years. This supports supervision, complaint handling, and evidence that the provider has complied with its duties.

Question 19Regulatory, legal and ethical framework for financial services

Which statement correctly describes the role of a nominated representative under the New Zealand financial advice regime?

  1. Must be a director or senior manager of the FAP
  2. Must hold an individual financial adviser licence issued by the FMA
  3. May give advice for a licensed FAP, which is accountable Correct answer.
  4. May keep commission payments without disclosing them to clients

Explanation

A financial advice provider holds the licence; individuals may act as financial advisers or nominated representatives under it. A nominated representative can give advice on the provider's behalf, and the provider remains accountable for compliance with the Code and licensing obligations.

Question 20Regulatory, legal and ethical framework for financial services

A financial advice provider receives a client's insurance premium for forwarding to the insurer. How should the provider handle that money?

  1. Use it to pay the provider's commission before forwarding the balance
  2. Deposit it into the provider's general business account
  3. Keep it until the policy renewal date
  4. Hold it in a separate trust account and account for it properly Correct answer.

Explanation

A financial advice provider that handles client money must hold it in a separate trust or client money account and keep proper records. Client money must not be mixed with the provider's business funds or used to pay commission before it is forwarded.

Question 21Regulatory, legal and ethical framework for financial services

A New Zealand business wants to provide regulated financial advice about general insurance policies to retail clients. Which regulator is responsible for licensing the business as a financial advice provider and monitoring its compliance with the Code of Professional Conduct for Financial Advice Services?

  1. Reserve Bank of New Zealand (RBNZ)
  2. Ministry of Business, Innovation and Employment (MBIE)
  3. Insurance Council of New Zealand (ICNZ)
  4. Financial Markets Authority (FMA) Correct answer.

Explanation

The Financial Markets Authority administers the financial advice provider licensing regime under the Financial Markets Conduct Act 2013, as amended by the Financial Services Legislation Amendment Act 2019. It also monitors compliance with the Code of Professional Conduct. The Reserve Bank of New Zealand prudentially supervises insurers, MBIE has a policy role, and ICNZ is an industry body.

Question 22Regulatory, legal and ethical framework for financial services

Which New Zealand statute introduced the financial advice provider licensing regime and the Code of Professional Conduct for Financial Advice Services?

  1. Financial Services Legislation Amendment Act 2019 Correct answer.
  2. Insurance (Prudential Supervision) Act 2010
  3. Financial Markets Conduct Act 2013
  4. Financial Advisers Act 2008

Explanation

The Financial Services Legislation Amendment Act 2019 replaced the Financial Advisers Act 2008 regime with the financial advice provider licensing regime and provided for the Code of Professional Conduct for Financial Advice Services. The Financial Markets Conduct Act 2013 is the parent statute that the 2019 amendment changed, not the statute that introduced the regime.

Question 23Regulatory, legal and ethical framework for financial services

A claimant asks a general insurer for a copy of the personal information the insurer holds about them. Under the Privacy Act 2020, by when must the insurer respond to the request?

  1. Within 20 working days Correct answer.
  2. Within 5 working days
  3. Within 10 working days
  4. Within 3 months

Explanation

The Privacy Act 2020 requires an agency to respond to a personal information access request as soon as practicable and no later than 20 working days after receiving it, unless a lawful extension applies. The insurer must tell the requester if an extension is needed.

Question 24Regulatory, legal and ethical framework for financial services

An insurer discovers that a digital claims file containing customers' health information has been accessed without authorisation, and the breach is likely to cause serious harm. Under the Privacy Act 2020, what is the insurer's primary obligation?

  1. Notify only those customers who contact the insurer about the breach
  2. Notify the Privacy Commissioner and affected individuals as soon as practicable Correct answer.
  3. Record the breach internally and review its security settings only
  4. Report the breach to the Financial Markets Authority within five working days

Explanation

Where a privacy breach is likely to cause serious harm, the Privacy Act 2020 requires the agency to notify the Privacy Commissioner and affected individuals as soon as practicable. The insurer should also contain the breach and assess it, but notification is the key external obligation.

Question 25Regulatory, legal and ethical framework for financial services

A general insurer refuses to offer income protection cover to an applicant because the applicant has a disability. Under the Human Rights Act 1993, when may an insurer lawfully differentiate on this ground?

  1. When the insurer has fewer than 50 employees
  2. When the decision is based on actuarial or statistical data and is reasonable in the circumstances Correct answer.
  3. Whenever the insurer's underwriting policy excludes all applicants with a disability
  4. Only when the applicant agrees to pay a higher premium

Explanation

The Human Rights Act 1993 allows insurers to differentiate on grounds such as disability, age and family status where the decision is based on actuarial or statistical data or other relevant information and is reasonable. A blanket exclusion without that evidential basis is unlawful discrimination.

Question 26Regulatory, legal and ethical framework for financial services

A financial advice provider holds an FMA licence and gives regulated advice to retail clients. Which additional registration is it normally required to maintain under the financial services regime?

  1. Registration on the Register of Financial Advisers maintained by the FMA
  2. Registration with the Insurance Council of New Zealand
  3. Registration on the Financial Service Providers Register Correct answer.
  4. Registration with the Reserve Bank of New Zealand as a licensed insurer

Explanation

Financial service providers, including licensed financial advice providers, must be registered on the Financial Service Providers Register before providing financial services. The FMA licence and FSPR registration are separate requirements, and ICNZ membership or RBNZ insurer licensing is not generally required to give insurance advice.

Question 27Regulatory, legal and ethical framework for financial services

Which requirement applies to a general insurer that is licensed by the Reserve Bank of New Zealand under the Insurance (Prudential Supervision) Act 2010?

  1. It must reinsure all risks with a Crown-owned insurer
  2. It must belong to an approved dispute resolution scheme only if it sells life insurance
  3. It must have a current financial strength rating from an approved rating agency Correct answer.
  4. It must be a member of the Insurance Council of New Zealand

Explanation

A licensed insurer must have a current financial strength rating from an approved rating agency and comply with Reserve Bank solvency standards. ICNZ membership is voluntary, and dispute resolution scheme membership is a financial services regime requirement rather than an IPSA licensing condition limited to life insurance.

Question 28Regulatory, legal and ethical framework for financial services

A financial advice provider gives regulated advice to retail clients about general insurance. Which dispute resolution arrangement does the financial services regime require?

  1. A private arbitration clause in every client agreement
  2. Membership of an approved dispute resolution scheme Correct answer.
  3. Reliance on the insurer's internal complaints process as the final step
  4. Access to the Insurance Council of New Zealand's complaints committee

Explanation

Financial service providers that deal with retail clients must be members of an approved dispute resolution scheme, and clients can take unresolved complaints to that scheme after the provider's internal process. The scheme provides an independent, externally accessible route, not private arbitration or an insurer's committee.

Question 29Regulatory, legal and ethical framework for financial services

An insurer plans to send claims records containing personal information about New Zealand customers to its overseas service provider for processing. Under the Privacy Act 2020, which approach best meets the cross-border disclosure rules?

  1. The insurer may send the information if the recipient has a privacy policy on its website
  2. The insurer may send the information if the customer has not objected within 10 working days
  3. The insurer may send the information only if the Privacy Commissioner gives prior written approval for each transfer
  4. The insurer must ensure the overseas recipient is subject to comparable privacy safeguards, or obtain informed consent after disclosing the risks Correct answer.

Explanation

Information privacy principle 12 permits cross-border disclosure if the overseas recipient is subject to comparable privacy safeguards, or if the individual gives informed consent after being told the destination and risks, or another exception applies. Prior approval from the Privacy Commissioner for each transfer is not the standard mechanism.

Question 30Regulatory, legal and ethical framework for financial services

A policyholder wants to sue a general insurer for breach of contract after the insurer declines a claim. Under the Limitation Act 2010, what is the usual limitation period for a money claim founded on contract?

  1. 2 years from the date of the loss
  2. 6 years from the date of the act or omission on which the claim is based Correct answer.
  3. 12 months from the date of the insurer's decline letter
  4. 3 years from the date the policyholder first became aware of the decline

Explanation

The Limitation Act 2010 generally gives a six-year limitation period for money claims, including claims founded on contract, running from the date of the act or omission on which the claim is based. A 12-month period may appear in a policy condition, but the statutory limitation period is not one year.

Question 31Regulatory, legal and ethical framework for financial services

A financial adviser explains a general insurance recommendation to a client who speaks limited English. Under the Code of Professional Conduct for Financial Advice Services, which standard requires the adviser to take reasonable steps to ensure the client understands the advice?

  1. Standard 10 – Protect client privacy
  2. Standard 1 – Treat clients fairly
  3. Standard 5 – Ensure clients understand the advice Correct answer.
  4. Standard 8 – Keep records

Explanation

Standard 5 requires an adviser to take reasonable steps to ensure the client understands the advice, taking into account factors such as language, complexity, and format. Fair treatment, record keeping, and privacy are dealt with under separate standards.

Question 32Regulatory, legal and ethical framework for financial services

A client reviews their general insurance claim file and asks the insurer to correct an inaccurate date of birth. Under the Privacy Act 2020, what must the insurer do?

  1. Refuse the request because an insurer may only correct information on a court order
  2. Delete the entire claim file to avoid holding inaccurate information
  3. Take reasonable steps to correct the information if satisfied it is inaccurate; if not satisfied, attach a statement of the correction requested Correct answer.
  4. Refer the request to the Financial Markets Authority for approval

Explanation

Information privacy principle 7 requires an agency to take reasonable steps to correct personal information if it is satisfied the information is inaccurate. If the agency is not satisfied, it must attach a statement of the correction sought to the information.

Question 33Regulatory, legal and ethical framework for financial services

An insurer collected a customer's personal information to assess a house insurance claim. The insurer now wants to use that information to market unrelated products to the customer. Under the Privacy Act 2020, what must the insurer do first?

  1. Nothing, because the information was lawfully collected
  2. Notify the Privacy Commissioner and wait 20 working days
  3. Obtain a court order authorising the secondary use
  4. Obtain the customer's authorisation, unless a permitted exception applies Correct answer.

Explanation

Information privacy principle 10 limits the use of personal information to the purpose for which it was collected unless the individual authorises a different use or a statutory exception applies. Marketing unrelated products generally requires authorisation or another permitted basis.

Question 34Regulatory, legal and ethical framework for financial services

A financial adviser recommends a new house insurance policy without reviewing the client's existing cover or sum insured. Under the Code of Professional Conduct for Financial Advice Services, which standard is most directly engaged?

  1. Standard 9 – Handle complaints
  2. Standard 4 – Provide suitable financial advice Correct answer.
  3. Standard 10 – Protect client privacy
  4. Standard 8 – Keep records

Explanation

Standard 4 requires financial advice to be suitable for the client's needs, goals, and circumstances. Recommending cover without checking existing cover or the sum insured may make the advice unsuitable.

Question 35Regulatory, legal and ethical framework for financial services

An insurer keeps paper claim forms containing personal information in an unlocked storage room. Under the Privacy Act 2020, which information privacy principle applies most directly?

  1. IPP 11 – Security safeguards Correct answer.
  2. IPP 3 – Collection from the individual
  3. IPP 12 – Disclosure outside New Zealand
  4. IPP 6 – Access to personal information

Explanation

Information privacy principle 11 requires an agency to take reasonable security safeguards to protect personal information against loss, access, use, modification, or disclosure. Leaving claim forms in an unlocked room raises a security-safeguards issue.

Question 36Regulatory, legal and ethical framework for financial services

A general insurer declines to offer travel insurance to an applicant because the applicant has a disability. The insurer can show the decision is based on actuarial or statistical data and is reasonable in the circumstances. Under the Human Rights Act 1993, is the insurer's decision lawful?

  1. No, because the Human Rights Act prohibits all differential treatment on the ground of disability
  2. No, because only the Privacy Commissioner can authorise disability-based insurance decisions
  3. Yes, because insurers are exempt from the Human Rights Act when selling general insurance
  4. Yes, because an exception permits differential treatment on the ground of disability if it is based on actuarial or statistical data and is reasonable Correct answer.

Explanation

The Human Rights Act 1993 contains an exception allowing insurers to treat people differently on the ground of disability where the decision is based on actuarial or statistical data and is reasonable in the circumstances. The insurer's decision can therefore be lawful if that exception is made out.

Question 37Regulatory, legal and ethical framework for financial services

A financial adviser will receive a commission from an insurer if a client takes out a recommended house insurance policy. Under the Code of Professional Conduct for Financial Advice Services, what must the adviser do about the commission?

  1. Pay the commission to the client before providing advice
  2. Obtain the insurer's written approval before disclosing it
  3. Disclose the commission to the client in a clear, concise, and effective manner Correct answer.
  4. Keep the commission confidential because it is commercially sensitive

Explanation

Standard 3 requires advisers to manage conflicts of interest and incentives, including by disclosing commissions and other incentives to clients. Disclosure must be clear, concise, and effective so the client can understand the adviser's interests.

Question 38Regulatory, legal and ethical framework for financial services

A client complains to a financial advice provider about advice on a general insurance policy. Under the Code of Professional Conduct for Financial Advice Services, which standard requires the provider to have a clear complaints handling process?

  1. Standard 3 – Manage conflicts of interest
  2. Standard 1 – Treat clients fairly
  3. Standard 5 – Ensure clients understand the advice
  4. Standard 9 – Handle complaints Correct answer.

Explanation

Standard 9 requires financial advice providers to have a clear, accessible complaints handling process and to deal with complaints fairly and promptly. The other standards address different conduct obligations.

Question 39Regulatory, legal and ethical framework for financial services

Under the New Zealand financial advice regime, which person or body approves the Code of Professional Conduct for Financial Advice Services?

  1. The Minister of Commerce and Consumer Affairs Correct answer.
  2. The Privacy Commissioner
  3. The Financial Markets Authority
  4. The Reserve Bank of New Zealand

Explanation

The Code of Professional Conduct for Financial Advice Services is approved by the Minister of Commerce and Consumer Affairs under the financial advice regime. The Financial Markets Authority monitors and enforces compliance with the Code but does not approve it.

Question 40Regulatory, legal and ethical framework for financial services

An insurer wants to collect a claimant's medical history from the claimant's doctor rather than from the claimant. Under the Privacy Act 2020, when may the insurer collect the information from the doctor?

  1. Whenever the insurer considers the doctor's records more reliable than the claimant's recollection
  2. Only if the Privacy Commissioner approves the collection in writing
  3. If the claimant authorises collection from the doctor, or if collection from the claimant is not reasonably practicable in the circumstances Correct answer.
  4. Only if the insurer has a court order

Explanation

Information privacy principle 2 generally requires collection directly from the individual, but permits collection from another person where the individual authorises it or where direct collection is not reasonably practicable. The insurer must still comply with other principles, including notification and security.

Question 41Insurance principles, risk and the role of insurance in the New Zealand market

Which statement best describes the principle of indemnity in general insurance?

  1. The insurer must replace every damaged item with a new item of equivalent type and quality.
  2. The insured receives the full sum insured whenever any claim is accepted under the policy.
  3. The insured is entitled to an additional profit margin to reflect the inconvenience of a claim.
  4. The insured is restored to approximately the financial position held before the loss. Correct answer.

Explanation

Indemnity aims to place the insured in the same financial position as before the loss, without betterment or profit. The sum insured is normally a maximum limit rather than an automatic payout. Replacement or agreed-value covers are policy terms that may alter how the measure is applied.

Question 42Insurance principles, risk and the role of insurance in the New Zealand market

Toka Tū Ake EQC provides natural hazard cover for residential buildings in New Zealand. Which statement best describes how this cover usually operates?

  1. EQC cover is automatically included in every private house insurance policy and is funded by the insurer alone.
  2. EQC provides statutory cover up to a cap, with private insurers covering loss above it. Correct answer.
  3. EQC replaces private house insurance entirely for all residential properties in New Zealand.
  4. EQC cover applies only to commercial buildings that are damaged by earthquake or landslip.

Explanation

EQC provides statutory natural hazard cover for residential buildings and land, subject to a capped amount. Private insurers commonly provide cover above that cap and administer claims alongside EQC. Commercial property is not covered by the residential EQC scheme.

Question 43Insurance principles, risk and the role of insurance in the New Zealand market

Why does New Zealand insurance law require an insured to have an insurable interest in the subject matter of a general insurance policy?

  1. To prevent the insured from paying premiums by instalment instead of in one annual amount.
  2. To ensure the policy is governed by New Zealand law rather than by overseas law.
  3. To guarantee that the insurer will always recover its expenses from the insured through premiums.
  4. To ensure the insured genuinely suffers financial or legal loss from the event. Correct answer.

Explanation

Insurable interest prevents insurance from being used as a wager and reduces moral hazard. The insured must stand to lose financially or legally if the insured event occurs. It does not govern premium payment methods or the choice of governing law.

Question 44Insurance principles, risk and the role of insurance in the New Zealand market

A New Zealand health insurer offers hospital cover at a single community-rated premium. Which outcome is the clearest example of adverse selection?

  1. An insurer invests premiums in low-risk government bonds.
  2. An insured deliberately exaggerates a claim after a sports injury.
  3. Less healthy customers buy cover early while healthy customers delay buying. Correct answer.
  4. A broker carefully compares policies from several insurers before recommending one to a client.

Explanation

Adverse selection occurs before or at contracting when people with higher expected risk are more likely to buy or keep cover. If healthier people delay or drop out, the remaining risk pool worsens and premiums may rise. Claim exaggeration and investment choices are different risk issues.

Question 45Insurance principles, risk and the role of insurance in the New Zealand market

An insured deliberately sets fire to unsaleable stock intending to claim the insured value. Which risk concept does this behaviour illustrate?

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

Explanation

Moral hazard involves dishonest or intentional behaviour that increases the likelihood or size of a loss because insurance exists. Morale hazard refers to carelessness or indifference, while physical hazard is a tangible condition that increases risk. Speculative risk involves the possibility of gain as well as loss.

Question 46Insurance principles, risk and the role of insurance in the New Zealand market

An insurer pays its insured $40,000 for water damage caused by a neighbour's negligent plumbing. The insurer then sues the neighbour to recover that amount. Which principle is the insurer relying on?

  1. Utmost good faith
  2. Subrogation Correct answer.
  3. Proximate cause
  4. Contribution

Explanation

Subrogation gives an insurer the right to pursue recovery from a third party after it has indemnified the insured. It supports the indemnity principle because the insured cannot recover twice for the same loss. The insured's rights against the third party pass to the insurer to the extent of the payment.

Question 47Insurance principles, risk and the role of insurance in the New Zealand market

A property owner has two indemnity policies covering the same building for the same risk. A loss occurs. How does the principle of contribution usually apply?

  1. Each insurer contributes rateably so the insured recovers no more than the loss. Correct answer.
  2. The first policy issued pays the full claim and the second policy is automatically void.
  3. The insured must choose one insurer and forfeit any claim against the other policy.
  4. The insured can recover the full $100,000 from each insurer and keep $200,000 in total.

Explanation

Contribution applies when more than one indemnity policy covers the same loss, allowing insurers to share the payment. The insured should not recover more than the actual loss, so double recovery is prevented. Insurers usually contribute rateably or under an agreed sharing formula.

Question 48Insurance principles, risk and the role of insurance in the New Zealand market

A storm causes a tree to fall, breaking a window; rainwater then enters and damages the interior. Under proximate cause, which event is generally treated as the cause of the interior damage?

  1. The building's age, because older buildings are more vulnerable to water damage.
  2. The rain entering the building, because that is the last event before the damage.
  3. The storm and falling tree, because they set in motion the chain of damage. Correct answer.
  4. The insured's failure to board up the window after the storm had passed.

Explanation

Proximate cause is the dominant or effective cause of a loss, not necessarily the last event in the sequence. A storm that causes a tree to break a window and let rain in is generally the operative cause of the resulting damage. Later events are considered in context rather than automatically treated as the cause.

Question 49Insurance principles, risk and the role of insurance in the New Zealand market

Which New Zealand body is responsible for licensing and prudentially supervising general insurers, while the Financial Markets Authority focuses on conduct and fair dealing?

  1. The Insurance Council of New Zealand.
  2. The Reserve Bank of New Zealand. Correct answer.
  3. Toka Tū Ake EQC.
  4. The Commerce Commission.

Explanation

The Reserve Bank of New Zealand licenses and prudentially supervises insurers under the Insurance (Prudential Supervision) Act 2010. The Financial Markets Authority is the conduct regulator, while the Insurance Council of New Zealand is an industry body. EQC administers natural hazard cover and the Commerce Commission enforces competition and fair trading law.

Question 50Insurance principles, risk and the role of insurance in the New Zealand market

A New Zealand general insurer buys reinsurance for part of its earthquake portfolio. What is the primary effect of the reinsurance on the ceding insurer?

  1. It eliminates the ceding insurer's obligation to hold any solvency capital for the reinsured risk.
  2. It transfers part of the insured risk to another insurer and can increase the ceding insurer's underwriting capacity. Correct answer.
  3. It converts the ceding insurer into a broker that no longer bears any risk under the original policy.
  4. It transfers all claims handling obligations to the reinsurer, so the original insured must claim directly from the reinsurer.

Explanation

Reinsurance is insurance for insurers: it transfers part of the risk to a reinsurer and can support the ceding insurer's capacity and solvency. The original insured remains a customer of the ceding insurer and has no direct contractual claim against the reinsurer. Capital relief may be available, but it does not automatically remove every capital requirement.