AIA Paper 1

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85 Terms

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Risk

uncertainty concerning a potential loss

  • Only financial and physical risks are insurable risks

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Potential Financial Results:

  • Risks may be considered as pure or speculative

    • Pure Risks: offer the potential of loss only no gain. Such risks include fire, accident…etc

    • Speculative Risks: offer the potential of gain or loss. Such risks include gambling, business ventures. Normally speculative risks are not insurable, because they’re engaged in voluntarily for gain 

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Cause and Effect

  • Risks may be considered as being either particular or fundamental

    • Particular Risks: they have limited consequences and affect an individual/fairly small number of people. The consequences may be serious for those involved but are localised. Such risks are motor accidents, personal injuries…

    • Fundamental Risks: their causes are outside the control of any one individual or even a group of individuals and their outcome affects a large number of people. Risks include famine, war. 

    • The majority of risks which are insured by commercial insurers are particular risks, fundamental risks aren’t normally insurable because it’s financial infeasible for insurers to handle them

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Risk Management:

  • Insurance companies will use the term in relation to pure risks but also to insured risks only 

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Functions and Benefits of Insurance: primary

  1. Primary Functions/Benefits:

  • Insurance is essentially a risk transfer mechanism, removing, for a premium, the potential financial loss from the individual and placing it upon the insurer

  • The primary benefit is seen in the financial compensation made available to insured victims

  • On the commercial side, thai enables businesses to survive major fires..

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Functions and Benefits of Insurance: ancillary

  1. Ancillary Functions/Benefits

  • Insurance contributes to society directly or indirectly in many different ways 

    • Employment: the insurance industry is a factor in local workforces 

    • Financials services: since the relative decline in manufacturing in HK, financial services have assumed a much greater role in the local economy, insurance being a major element in the financial services sector

    • Loss prevention and loss reduction: the practice of insurance includes various surveys and inspections related to risk management

    • savings/investments: life insurance offers a convenient and effective way of providing for the future

    • Economic growth/development: people will want to venture their capital on costly projects without the protection of insurance

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Contract:

  • A legally enforceable agreements 

  • Contracts comprise promisings/undertakings, usually given in exchange for a promise or undertaking from the other side 

  • In legal terminology, contracts are intangible. Therefore an insurance policy is not a contract but the most commonly used evidence of an insurance contract 

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Types of Contracts:Simple Contracts

  1. Simple Contracts

  • Although ‘simple’, it doesn’t mean they only deal with uncomplicated matters and are easy to understand. It means they are simple/easy to form

  • A simple contract is one created verbally or by writing not under seal. It can also be inferred from conduct. The validity of simple contracts doesn’t depend on special formalities

  • The majority of insurance contracts are simple contracts. They do not have to be evidenced in writing technically, but in practice they almost always are. Some insurance contracts though are legally required to be evidenced by insurance policies


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Types of Contracts: Contracts by Deeds

  1. Contracts by Deeds

  • A deed is a written instrument signed, sealed, and delivered.

  • Delivery is not required to be physical delivery, an intention to be unconditionally bound by the deed suffices

  • It must be used with certain transactions like transfer of land. Suretyship is always issued in the form of a deed or else when a claim arises, the obligee may face a defence put up by the surety that he has not the right to sue because he has provided no consideration

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Elements/Essentials of a Contract:


  1. Offer

  • If no offer is made, there can be no agreement between the parties

  • In insurance, the offeror may be the intending insured or the insurer depending on intention 

  • So although it is widely accepted that an act of completing an insurance proposal form is normally an act of offer, it’s technically incorrect to say it’s a settled law that completing an insurance proposal form is an act of offer to the insurer


  1. Acceptance

  • The proposed contract cannot come into being unless the offer is accepted by the offeree

  • All terms of the offer must be accepted before a contract is concluded

  • If that other party intends to vary the terms of the proposed contract, this will constitute as a counter-offer which will have the effect of nullifying the original offer

  • A counter offer is subject to acceptance by the original offeror who now becomes the offeree of the counter offer


  1. Consideration

  • This is the price a contracting party pays for the promise the other party makes to him

  • In the case of a simple contract, consideration must be given by both parties otherwise it’s void. 

  • In a promise contained in a deed, even if it’s been given not for consideration, it’s enforceable at common law by the promisee

  • In insurance, the consideration is: the promise by the insured to pay premium and the promise by the insurer to pay or compensate as per policy terms


  1. Capacity to Contract

  • Means the legal ability to enter into a contract. With individuals, if they’re mentally disordered or are minors, the contracts they make are generally voidable at their option

  • With companies they must not act in a way that exceeds their legal powers


  1. Legality

  • The subject of the agreement must be legal

  • A contract that commits any crimes is not valid

  • However exceptions exist like the courts may enforce an insurance claim in favour of an insured under an insurance contract that has been held to be illegal simply because of the insurer’s failure to meet the statutory requirement for authorisation to transact the kind of insurance business in question


  1. Intention to Create Legal Relation

  • To make a valid contract, each party must clearly have the intention that it’s to have legal consequences. This seldom gives rise to any problem with insurance contracts because unlike social/domestic agreements, commercial agreements are presumed to be made with an intention to create legal relation

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  •  If any of these elements are absent, the proposed contract doesn’t exist or is defective. The three types of defective contracts are:

  1. Void or Invalid Contracts

  • Meaning: The contract never legally existed—it’s completely invalid from the start.

  • Effect:

    • No legal rights or obligations for either party.

    • In insurance: Any premiums or claims paid must usually be returned.

  • Example: An illegal agreement (e.g., a contract for an illegal activity).


  1.  Voidable Contracts

  • Meaning: The contract is valid and binding unless one party (usually the wronged party) chooses to cancel it within a reasonable time after discovering the issue.

  • Effect:

    • It remains enforceable unless the aggrieved party decides to void it.

    • In insurance: This might happen if the policyholder lied on their application or if the insurer breached key terms.

  • Example: A contract signed under fraud or misrepresentation.


  1. Unforceable Contracts

  • Meaning: The contract is technically valid, but cannot be enforced in court due to a missing legal formality.

  • Effect:

    • The contract is not void, but a court won’t help enforce it until the issue is fixed.

    • Once the problem is resolved (e.g., paying required fees), it becomes enforceable.

  • Example: A marine insurance policy that wasn’t properly issued (but can be fixed later).

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Privity of Contract:

  • In common law, there’s the doctrine of privity of contract which consists of 2 rules:

  1. First a third party is not obliged to perform the terms of a contract to which he isn’t a party

  2. Second a third party cannot enforce a right under a contract to which he isn’t a party, even if the contract expressly confers a benefit on the third party

  • Cap 623 makes exceptions to both these rules. It provides a third party to a contract who is expressly identified in the contract by name, as a member of a class or as answering a particular description may enforce a term. A third party can enforce a contract term if they are clearly intended to benefit from it.

  • Once they accept or rely on the term, the original parties can’t easily change it without their approval—unless the contract says otherwise and they were properly informed.

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The Law of Agency:

  • The key legal principle is that He who acts through another is himself performing the act." This means: The principal is legally responsible for what their agent does (if authorized).

  • Even unauthorized actions can sometimes bind the principal (depending on the situation).

    • Example: If a mother (principal) sends her child (agent) to buy groceries on credit, the mother is legally bound to pay—not the child.

  • The principal can be held legally responsible for their agent’s actions (or mistakes).

    • This is called vicarious liability (liability for someone else’s conduct).

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Agency

  • Agency is a legal relationship where one person (the agent) acts on behalf of another (the principal).

  • No formal contract is needed—agency can arise naturally (e.g., a child buying groceries for their mom).

  • The law of agency is the rules of law which govern an agency relationship.the law of contract also has to be considered as the agent often arranges an agreement with the third party on behalf of his principal. 

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There are two contracts involved:

  • Agent-Principal Relationship (duties & authority).

  • Principal-Third Party Contract (created by the agent’s actions).

    • Example: A child (agent) buys sugar for their mother (principal) → The store’s contract is with the mother, not the child.

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An agency relationship starts with:

  • An agency can be created in two main ways:

  1. By Agreement (Express or Implied)

  • Express Agreement: Clearly stated (written or spoken).

  • Implied Agreement: Assumed based on actions (e.g., an employee handling company purchases).

  1. By Ratification (After-the-Fact Approval)

  • If an agent acts without authority, the principal can later approve (ratify) the action, making it legally binding.

  • Example: An insurance agent sells a policy they weren’t authorized to offer. If the insurer later accepts the deal, the contract becomes valid from the start.

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Authority of Agents:

1. Authority vs. Agency Relationship

  • Authority means someone (the agent) can legally act for another (the principal).

  • But just because an agent has authority doesn’t always mean they have a full agency relationship (e.g., right to get reimbursed for expenses).

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Types of Authority an Agent May Have

  1. Actual Authority (Real Permission)

  • The principal clearly allows the agent to act for them in Two Types:

    • Express Actual Authority – Directly given (e.g., written or spoken instructions).

    • Implied Actual Authority – Assumed from actions (e.g., an employee handling routine tasks without being told each time).


  1. Apparent Authority (Looks Real to Outsiders)

  • The principal makes it seem like the agent has authority (even if they don’t).

  • Example: An insurance agent is told not to cover cargo to West Africa.

  • But if the agent keeps doing it and the insurer accepts it beforehand, a third party can assume the agent has authority—even if they don’t.


  1. Authority of Necessity (Emergency Power)

  • In urgent situations, someone can act as an agent without permission to protect the principal’s interests.

  • Example: A neighbor pays a sick friend’s insurance premium to avoid policy cancellation. The friend must repay the neighbor, and the insurer can’t deny claims just because the renewal wasn’t authorized.


  1. Agency by Estoppel (Principal’s Fault for Misleading)

  • If the principal lets others believe someone is their agent, they can’t later deny it.

  • Key Difference from Apparent Authority: Apparent Authority = Agent has some real authority but exceeds it.

  • Estoppel = Agent has no real authority at all, but the principal made it seem like they did.

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Duties Owed by Agent to Principal:

  1. Obedience: The agent has to follow all lawful instructions of his principal strictly or as best as is reasonably possible.

  2. Personal performance: The agent is not allowed to delegate his authority and responsibilities to others (subagents) unless he has authority to do so.

  3. Due care and skill: The law does not demand perfection, and an agent is normally only required to display all reasonably expected skills and diligence in performing his duties. Whilst his principal may be bound by his lack of care, the principal may in turn reclaim from the agent in respect of a loss caused by the lack of care.

  4. Loyalty and good faith: The agent’s obligations of loyalty and good faith are governed by several strict rules of law, the no conflict rule being one of them.

  5. Accountability: The agent has to account for all money or other things he receives on behalf of his principal. He also has to keep adequate records relating to the agency activities.

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Duties Owed by Principal to Agent:

  1. Remuneration: the agent is entitled to receive commission or other remuneration as agreed. The principal has to pay within a reasonable time/any specified time 

  2. Expenses: the principal, subject to any express terms in the agency agreement, has to reimburse the agent for costs and expenses properly and reasonably incurred by the agent on behalf of the principal 

  3. Breach of duty: the agent may take action against the principal for the latter’s breach of obligations to him

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Termination of Agency:

  1. Mutual Agreement: Generally speaking, all agreements may be terminated by mutual agreement, on terms agreed between the parties.

  2. Revocation: Subject to any contract terms as to notice and/or compensation, either the principal or the agent may revoke (i.e. cancel) the agreement during its currency.

  3. Breach: If either the principal or the agent commits a fundamental breach of contract, the other party may treat the contract as ended (with a possible right of compensation). 

  4. Death: Because an agency relationship is a personal one, the death of either the principal or the agent will end the agreement. Should either party be a corporate body (company), its liquidation will have the same effect.

  5. Insanity: If either the principal or the agent becomes insane so that he no longer can perform the agreement, the agreement will automatically come to an end.

  6. Illegality: If it happens that the agency relationship or the performance of the agreement is no longer permitted by law, this will automatically end the agreement. Suppose a British company (buying agent) has a contract with a company (principal) incorporated and domiciled in another country whereby the buying agent will purchase in the United Kingdom stuffs like wheat, steel, sulphur and other chemicals on behalf of the principal. On the outbreak of a war between the two countries, this agreement will, in the English law, automatically end for illegality.

  7. Time: If the agreement is for a determined period, it will terminate at the end of such period.

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Insurable Interest:

  • Insurable interest is a person's legally recognised relationship to the subject matter of insurance that gives them the right to effect insurance on it 

  • Since the relationship must be a legal one, a thief in possession of stolen goods doesn’t have the right to insure them 

  • An insurance agreement is void without insurable interest. The rules relating to return of premiums under such an agreement vary as between the different classes of insurance 

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Insurable Interest Existence Essential Criteria:

  1. There must be some person, property, liability, or legal right capable of being insured 

  2. That person must be the subject matter of the insurance 

  3. The proposer must have the legally recognised relationship to the subject matter of insurance , so that financial loss may result to him if the insured event happens 

  • However, insurable interest is sometimes legally presumed without the need to show financial relationship. For example, any person is regarded as having an insurable interest in the life of their spouse.

  • However, a financial relationship alone is not sufficient to give rise to insurable interest. 

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How Insurable Interest Arises:

  • Insurable interest arises in a variety of circumstances, which may be considered under:

  1. Insurance of the Person:

  • Everyone has an insurable interest in his own life, limbs, etc. 

  • One also has an insurable interest in the life of one’s spouse. Further, one may insure the life of one’s child or ward who is under 18 years of age, and a policy that won’t become invalid upon the life insured turning 18


  1. Insurance of Property:

  • Physical things

  • The most obvious example arises in absolute ownership

  • Executors, administrators, trustees and mortgagees who have less than absolute ownership may respectively insure the estate, the trust property, and the mortgaged property


  1. Insurance of Liability

  • Everyone facing potential legal liability for their own acts or omissions may affect insurance to cover the risk, such liability being termed ‘direct liability’ or ‘primary liability’

  • Insurance against vicarious liability is possible where employers insure against their liability to members of the public arising from negligence 


  1. Insurance of Legal Rights

  • Anyone legally in a position of potential loss due to infringement of rights or loss of future income has the right to insure against such a risk

  • Anyone (agent) who has authority from another (principal) to effect insurance on the principal’s behalf will have the same insurable interest to the same extent as the principal

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When is Insurable Interest Needed?

  • With life insurance, insurable interest is only needed at policy inception 

    • Suppose a woman had effected a whole life policy on the life of her husband, who died some years later. When the woman presented a claim to the insurer, the latter discovered that at the time of the man’s death, they were no longer in the relationship of husband and wife. That means the woman had no insurable interest in the life of the deceased at the time of the death. Nevertheless, this lack of insurable interest will not disqualify her for the death benefit.

  • However, with marine insurance, insurable interest is only needed at the time of loss

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Assignment of Insurable Interest:

  • The transfer of a right. There’s two types:


1. Assignment of the Insurance Policy (Contract)

  • The entire policy ownership transfers to the new person (assignee).

  • After assignment, the insurer pays the assignee (not the original policyholder) for any future claims.

  • Example: If you sell your car and transfer the car insurance policy to the buyer, they now own the policy.

  • Key Rules: 

    • Both parties (assignor & assignee) must have an "insurable interest" (financial stake) in what’s insured at the time of transfer.

    • Insurer’s consent may be needed (except for life insurance and marine cargo policies, which can be assigned freely).

  • Usually requires the insurer's consent – Because the new owner (assignee) steps into your shoes as the policyholder.

  • Exceptions: Life insurance policies and marine cargo policies can be reassigned without the insurer’s approval.


2. Assignment of Insurance Money (Proceeds)

  • Only the right to receive claim payouts is transferred (not the policy itself).

  • The original policyholder remains insured, but the assignee can collect the money if a claim is paid.

  • Example: A business assigns its fire insurance payout rights to a bank as loan collateral.

  • Key Rules:

    • No insurable interest needed for the assignee (can be a gift).

    • No insurer consent required (works for any insurance type).

  • No insurer consent needed – You can freely transfer the right to receive claim payouts to someone else (like giving a gift).

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Important Notes: Assignment of Insurable Interest:

  • Obligations stay with the original policyholder – Even if you transfer rights, duties (like paying premiums) don’t automatically shift unless the insurer agrees.

  • "Pay to X" clauses ≠ Assignment – If a policy says "Pay claims to my brother," that’s just an instruction—your brother can’t sue the insurer unless it’s a formal assignment.

  • Legal assignments must follow specific rules (like written notice under Hong Kong’s Law Amendment Ordinance).


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Utmost Good Faith:

  • Ordinary Good Faith

    • Meaning: In most contracts, both parties must be honest, but they don’t have to volunteer all important information.

    • Example: If you board a bus and pay the fare, the bus company doesn’t have to warn you that all seats are taken. You can’t cancel your ticket just because you didn’t know.

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Utmost Good Faith:

  • Meaning: Insurance requires higher honesty—both parties must disclose all key facts, even if not asked.

  • Example: If you apply for fire insurance, you must tell the insurer about past fires (even if the form doesn’t ask).

  • Why? Insurers rely on your honesty to set fair terms.

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Extra Rules in Insurance Policies:

  • Strict Truth Required: Some insurers make you promise that every detail (even minor ones) is 100% accurate.

    • Example: Saying you’re "30" on a health form when you’re "31" could void the policy—even if age doesn’t affect the risk.

  • Waivers for Small Mistakes: Some policies excuse honest errors (unless they’re fraudulent).

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When to Disclose Material Fact:

  • A material fact is any information that would affect an insurer’s decision about:

    • Whether to accept the risk (e.g., "This person has terminal cancer").

    • How much to charge (premium) (e.g., "This driver has 3 speeding tickets").

    • Both (e.g., "This person has diabetes"—may affect both acceptance and cost).

  • Key Point: The test is whether a careful, reasonable insurer (not just this insurer or the customer) would care about the fact.

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Facts You Don’t Have to Disclose (Unless Asked)

  • Common knowledge (e.g., "Gasoline is flammable").

  • Facts the insurer already knows (e.g., "Pirates operate near Somalia").

  • Facts that reduce risk (e.g., Not telling the insurer your building has a fire sprinkler system is fine—it lowers risk, so hiding it doesn’t hurt them)

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Examples to Clarify:

Must Disclose:

  • Life insurance applicant hides a brain tumor → Breach of duty (insurer might reject the risk).

  • Car insurance applicant hides a DUI conviction → Breach (insurer would charge more).

Don’t Need to Disclose:

  • Not mentioning your house has a security system → OK (lowers risk, so no penalty for silence).

  • Not explaining that earthquakes are rare in your area → OK (common knowledge).

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When to Disclose Material Facts:

  1. Duration at common law: When Applying for Insurance (Common Law Rule)

  • You must disclose all material facts (important details) up until the contract is finalized.

  • After the policy starts, you don’t have to update the insurer about new risks (unless the policy says so).

    • Example: You apply for health insurance on Jan 2, get approved, and then find out on Jan 16 you have malaria. You don’t have to tell the insurer (unless the policy requires it).

  • But: The insurer might still deny claims for pre-existing conditions if the policy excludes them.


  1. Duration under policy terms: During the Policy Term (If the Policy Says So) 

  • Some non-life policies (e.g., car, home, accident insurance) require you to report new risks (like a job change in accident insurance).

  • Common law default: You only need to update them at renewal time (unless the contract requires sooner).


  1. At Renewal Time

  • The duty to disclose resets—you must share any new material facts (like a new health issue before renewing medical insurance).

  • Exception: Life insurance renewals don’t revive this duty (you only disclose at the start).


  1. Contract Alterations: When Changing the Policy

  • If you add coverage (e.g., adding theft protection to home insurance), you must disclose all new risks (e.g., past thefts, security measures).

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Key Takeaways:

  • At application: Disclose everything important until the policy is approved.

  • After approval: Only update if the policy requires it or at renewal.

  • Life insurance: No need to update at renewal (unlike other policies).

  • Policy changes? Full honesty required again.

  • Why It Matters: Avoids claim denials for hiding key facts. Keep your coverage valid when risks change.

  • Simple Rule: When in doubt, ask if a fact would change the insurer’s decision—if yes, disclose it!

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Types of Breach of Utmost Good Faith:

  • Insurance contracts require complete honesty (called "utmost good faith"). When this rule is broken, it's called a breach, and there are 4 main types:

  1. Fraudulent Misrepresentation

  • What? Intentionally lying about an important fact.

  • Example: You know your car has engine problems but tell the insurer it's in perfect condition.


  1. Non-Fraudulent Misrepresentation

  • What? Giving false information by accident or carelessness (not intentional).

  • Example: You mistakenly say your home has a security system (because you forgot it broke last month).


  1. Fraudulent Non-Disclosure

  • What? Purposely hiding a key fact the insurer should know.

  • Example: You don’t mention a recent heart attack when applying for life insurance.


  1. Non-Fraudulent Non-Disclosure

  •  What? Accidentally or carelessly forgetting to share an important fact.

  • Example: You genuinely didn’t realize your new job (e.g., becoming a deep-sea welder) affects your life insurance risk

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Remedies for Breach of Utmost Good Faith:

  1. Cancel the Entire Policy (Rescission)

  • What happens? The insurer can void the contract from the beginning (as if it never existed).

  • Result: If innocent/accidental breach: Premiums (and any claims paid) are usually refunded.

  • If fraudulent breach: The insurer keeps the premiums (as punishment for intentional lying).

  • Example: If you hid a pre-existing illness when buying health insurance, the insurer can cancel your policy and refund your premiums (unless you lied on purpose).


  1. Sue for Damages (If the Breach Was Fraudulent or Negligent)

  • What happens? The insurer can take legal action to recover money lost due to your misrepresentation.

  • Example: If you lied about your driving record to get cheaper car insurance, the insurer could sue you for the difference in premiums they should have charged.


  1. Ignore the Breach (Waiver)

  • What happens? The insurer can choose to overlook the breach, making the contract fully valid.

  • Example: If you forgot to mention a minor risk (like a small home renovation), the insurer might decide to honor the policy anyway.

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Important Rule:

  • The insurer cannot pick and choose—they must either:

  • Cancel the whole policy, or Accept it fully (they can’t deny just one claim while keeping the rest of the policy active).

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Why It Matters:

  • For insurers: Ensures they can’t unfairly keep your money while denying coverage.

  • For policyholders: Encourages complete honesty to avoid losing protection.

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Proximate Cause:

  • The proximate cause is the main, dominant reason something happened—the one that directly led to the loss.

  • Why does it matter? Insurance doesn’t cover every possible cause of damage.

  • To decide if a claim is valid, insurers need to figure out the one key cause (even if multiple things contributed).

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Types of Causes (Perils) in Insurance

  • When figuring out the proximate cause, insurers classify risks into 3 types:


  1. Insured Peril

  • A risk explicitly covered by the policy.

  • Example: Fire in a fire insurance policy. Car crash in auto insurance.


  1. Excluded Peril

  • A risk specifically NOT covered (even if it’s normally insured).

  • Example: War damage in a fire policy (even if fire is covered, war is excluded). Earthquakes in a standard home policy (unless added separately).


  1. Uninsured Peril

  • A risk not mentioned in the policy (not covered, but not excluded either).

  • Example: Rain in a fire policy (not listed as covered or excluded—so no claim).

  • Theft in a basic fire policy (unless fire led to the theft, like a burglar breaking in after a fire).

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How It Works in Real Life

  • If multiple causes contribute to a loss, insurers look for the dominant one.

  • Covered? → Claim paid.

  • Excluded/Uninsured? → No claim.

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Other Features:

  • Neither the first nor last cause necessarily constitutes the proximate cause

  • There can be more than one main cause (like an employee stealing AND their manager being careless)

  • The cause doesn't have to happen on your property (like water damage from a neighbor's fire)

  • Even if the main cause isn't covered, you might still get paid in special cases

  • A) Chain reaction situations:

    • Good news: If a covered cause leads to an uncovered problem, you're usually covered

    • Example: Fire (covered) causes water damage from fire hoses (not normally covered) → Still paid

    • Bad news: If an excluded cause starts the chain, you're usually not covered

    • Example: War (excluded) causes a fire (covered) → Not paid because war started it


  • B) Multiple causes at same time:

  • If some are covered and some aren't, it gets complicated - may need to talk to lawyers

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How Insurance Policies Change the Proximate Cause Rules:

  1. The "Directly or Indirectly" Trick

  • Normally: Insurers only care about the main cause (proximate cause) of damage.

  • But if policy says: "We exclude losses directly or indirectly caused by [X]" → They can deny more claims.

  • Even if [X] was just a small contributing factor (not the main cause), the claim may be denied.

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2. The "Delay" Loophole

  • Some policies say: "We won’t pay for losses caused by delays—even if the delay was due to a covered risk."


  • Real Example: A shipment of 2011 calendars was delayed (arrived in February 2011 instead of December 2010) because the ship had a collision (a covered peril).

  • The insurer refused to pay for the "loss of market" (calendars arriving after New Year’s were worthless).

  • Why? The policy excluded delay-related losses, even though the delay was caused by a covered event (the collision).

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Indemnity:

  1. What is Indemnity?

  • Indemnity means getting paid exactly what you lost—no more, no less.

  • Goal: Put you back in the same financial position you were in before the loss.


  1. Where Does Indemnity Apply?

  • Applies to: Property, car, home, or business insurance (where losses can be measured in money).

  • Does NOT apply to: Life insurance (you can’t put a dollar value on a person’s life)

  • Personal accident insurance (e.g., losing a limb—no "exact" financial value).

  • Exception: Medical expenses (even in accident insurance) are indemnity because bills have fixed costs.


  1. Link to Insurable Interest

  • Insurable interest = Your financial stake in what’s insured.

  • Indemnity pays up to that amount (e.g., if your $10K car is totaled, you get $10K, not $20K).

  • But life/accident insurance can’t measure "interest"—so they pay a fixed benefit (e.g., $500K for death).


  1. How Insurers Pay Indemnity

  • For property claims, insurers can choose 4 ways to compensate you:

  • Cash (straightforward payment).

  • Repair (e.g., fixing a dented car door).

  • Replacement (giving you a new item, like a phone).

  • Reinstatement (rebuilding/restoring damaged property to its original state).


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Salvage:

  • If something remains after damage (like a burned chair or car wreck), it's called "salvage."

  • Two ways insurers handle it:

    • Pay you less and let you keep the damaged item

    • Example: $5,000 claim for fire damage - $500 salvage value = $4,500 paid to you*

  • Pay full amount but take the damaged item to sell themselves

  • Maritime Note: In shipping, "salvage" means rescuing ships at sea for a reward - completely different meaning.

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Special Marine Insurance Rule (Abandonment)

  • Only in marine insurance can you:

  • Give the damaged ship/cargo to the insurer

  • Get full payment in return

  • The insurer then owns whatever remains (can repair/sell it)

  • Other insurance types don't allow this - you can't give your wrecked car to the insurer for full payment.

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Policy Provisions Preventing Indemnity:

  • Insurance promises to compensate you for losses, but policy terms often reduce what you actually get. Here’s how:


  1. Under-Insurance ("Average" Clause)

  • What? If you insure property for less than its full value, claims are reduced proportionally.

  • Example: Your property is worth $4M, but you only insure it for $1M (25% coverage).

  • If a fire causes $100K damage, you only get $25K (25% of the loss).

  • Why? To discourage people from cheaping out on coverage.

  • Note: In marine insurance, "average" means partial loss (not under-insurance).


  1. Deductibles (Excess)

  • What? You pay the first part of any claim; the insurer covers the rest.

  • Example: Your car insurance has a $4K deductible.

  • Accident repair costs $14K → You pay $4K, insurer pays $10K.

  • If repairs cost $3K (below deductible) → You pay everything.


  1. Franchise (Rare Today)

  • What? Like a deductible, but if the loss exceeds the threshold, the insurer pays the full amount (not just the excess).

  • Example: Ship insured for $5M with a 5% franchise ($250K).

  • $100K damage (below 5%) → $0 paid.

  • $1M damage (above 5%) → Full $1M paid.

Time Franchise Example:

  • Hospital policy has a 2-day waiting period.

  • Stay 1 day → $0 paid. Stay 5 days → All 5 days covered.


4. Policy Limits

(a) Single Article Limit

  • What? A cap on payouts for one expensive item in a general policy (e.g., jewelry in home insurance).

  • Example:

  • Your $90K Rolex is stolen, but your home policy has a $10K single-item limit.

  • You only get $10K (unless you specifically insured the watch separately).


(b) Section Limit

  • What? Different parts of a policy (e.g., travel insurance covering medical + luggage + liability) have separate payout caps.

  • Example: Travel policy covers: Medical bills → Up to $50K. Lost luggage → Up to $2K

  • If you hit both limits, you can’t borrow from one section to cover the other.

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Policy Provisions Providing More Than Indemnity: When Insurance Pays MORE Than Your Actual Loss

  • Normally, insurance only covers what you actually lost (no profit allowed). But some policies break this rule to keep customers happy. 


  1. Reinstatement Insurance

  • What? Pays to rebuild/replace damaged property without deducting for wear and tear or depreciation.

  • Example: Your 10-year-old roof burns down → Insurer pays for a brand-new roof, even though the old one was worn out. 

  • Common in: Fire insurance, commercial "all risks" policies.


  1. "New for Old" Coverage

  • What? Replaces old items with new ones (no deduction for age).

  • Example: Your 5-year-old TV is stolen → Insurer buys you a new current model.

  • Common in: Home insurance, boat (marine hull) insurance.


  1. Agreed Value Policies

  • What? You and the insurer agree upfront on an item’s value (no haggling later).

  • Total loss? You get the full agreed value, even if the item’s market value dropped.

  • Partial loss? You get the actual repair/replacement cost.

  • Used for: Jewelry, art, antiques (where value is subjective or stable).


  1. Marine Insurance (Special Case)

  • Almost all marine policies (ships, cargo) use agreed values.

  • If your ship sinks, you get the full pre-agreed amount, no questions asked.

  • Why Do Insurers Do This? Customer satisfaction: People get mad when insurers deduct for depreciation.

  • Marketing: "New for old" sounds better than "We’ll pay what your stuff was worth after 5 years of use."

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The Problem With Indemnity

  • Technically fair, but unpopular:

  • Most people think they should get what they insure for, not the depreciated value.

  • Arguments often arise over how much something has depreciated.

  • Example: "My 8-year-old laptop was basically new!"

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Contribution:

  • When two or more insurance policies cover the same risk, and the total coverage exceeds the actual loss, the insurers share the cost of paying the claim.

  • For contribution to apply, all of these must be true:

  1. Both policies must be indemnity-based (not fixed-benefit, like life insurance).

  2. Both must cover the same interest (e.g., the owner’s insurance and warehouse’s insurance on the same goods do not share costs—they cover different interests)

  3. Both must cover the same peril (e.g., both must include fire damage).

  4. Both must cover the same property/liability

  5. Neither policy must exclude contribution.

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How Contribution Works:

  • One insurer pays the full claim (as if no other policy existed).

  • That insurer then asks other insurers to chip in (based on their "rateable proportion").

  • Example: If Policy A covers 60% of the risk and Policy B covers 40%, they split the claim that way.

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When Contribution Doesn’t Apply:

  • Example:

  • A merchant insures his goods in a warehouse.

  • The warehouse also insures the same goods (as a "bailee," responsible for safekeeping).

  • A fire destroys the goods → Both can claim separately (no contribution).

  • Why? The merchant’s policy covers his ownership interest, while the warehouse’s policy covers its liability interest.

  • But wait! The merchant’s insurer can use subrogation (see next section) to recover costs from the warehouse if it was negligent.

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When Does Contribution Apply?

  • Only for indemnity policies (where you're repaid for actual losses).

  • Does NOT apply to life insurance (you can claim full payouts from multiple life policies).

  • If you have multiple policies on the same thing, insurers will share the bill—but only if they cover the same interest and risk. Otherwise, you might need subrogation to sort it out!

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3 Ways Policies Change Contribution Rules:

  1. Rateable Proportion Clause

  • What it means: Each insurer only pays their "fair share" of a claim.

  • Example: You have 2 fire policies: Insurer A covers 25% ($50K of a $200K loss), Insurer B covers 75% ($150K).You can't demand $200K from just Insurer A – you must claim from both

  1. Non-Contribution Clause

  • What it means: "We won't pay if another policy covers this better."

  • Example: Your home insurance says it won't cover "items insured elsewhere." Your $3,000 camera is separately covered by an "All Risks" policy. If stolen, only the All Risks policy pays – home insurance refuses.


  1. Partial Contribution (Marine Clause Example)

  • What it means: "We'll only pay what other policies don't cover."

  • Example: Marine policy covers cargo fire damage up to $100K. Fire policy covers the same but says: "We pay only above $100K." If loss is $150K: Marine pays $100K → Fire pays remaining $50K.

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Subrogation

  • When your insurer pays your claim, they step into your shoes to recover money from whoever caused the loss.

  • Example: A negligent driver crashes into your car. Your insurer pays for repairs → Then sues the driver (in your name) to recover their costs.

Process:

  • You get paid by your insurer for the loss.

  • Your insurer takes over your legal rights to chase the at-fault party.

  • Any money recovered:

    • First repays the insurer (up to what they paid you).

    • Extra money (if any) goes to you.

  • Exception:

    • Life insurance has no subrogation (since it’s not "compensation" but a fixed payout).

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Where Subrogation Applies:

  1. Negligence (Tort)

  • Example: Insurer sues a neighbor whose faulty wiring caused a fire in your home.


  1. Contract Breaches

  • Example: Insurer sues a tenant who damaged your rented property.


  1. Workplace Injuries

  • Example: If your employer pays workers’ comp, their insurer can sue the at-fault driver who hit you at work.


  1. Salvage Rights

  • Example: After paying for your totaled car, the insurer sells the wreck for scrap.

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Other Considerations:

  • No double recovery: You can’t keep both the insurance payout and money from the at-fault party.

  • Insurer’s limit: They can’t recover more than they paid you (unless it’s a total-loss abandonment).

  • Sharing recoveries:

    • If you have a deductible, you get reimbursed first.

    • If the claim was underpaid (e.g., due to policy limits), you may share the recovery.

  • Example Scenarios: Deductible: You paid $10K; insurer paid $40K. They recover $20K → Insurer keeps all $20K. Underinsurance: You were 20% underinsured → You get 20% of any recovery.

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Product Development:

  • Competition: Hong Kong’s insurance market is fierce—new ideas get copied quickly (sometimes in weeks!).

  • Customer Needs: Trends change (e.g., cyber insurance didn’t exist 20 years ago).

  • Flexibility: Even compulsory insurance (like car or workers’ comp) can be packaged or marketed differently.


  1. Create New Products

  • Example: A new "pet health insurance" plan for dog owners.

  • Challenge: Rivals will copy and possibly undercut prices fast.


  1. Bundle Products

  • Example: A "Business Owner Package" combining fire, liability, and cyber coverage.

  • Why? Convenience attracts bigger clients.


(c) Research

  • Study their own products (to improve).

  • Spy on competitors (to stay ahead).

  • Track market trends (e.g., rising demand for travel insurance post-pandemic).

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Customer Service

  • This team handles everything after the sale to keep clients happy. Key tasks:


  1. Correspondence

  • Answer questions (even weird ones like, "Does my policy cover my cat’s surgery?").


  1. Public Relations

  • Why it matters: Polite, clear responses build trust.

  • How staff treat clients shapes the company’s reputation.

  • Example: A rude agent = bad reviews online.


  1. Documentation

  • Issue policy copies, update details (e.g., change of address), or provide car insurance certificates.


  1. Complaints

  • Must be resolved fast and fairly—or they might escalate to regulators or the media.

  • Example: A delayed claim payout could go viral on social media.

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Marketing and Promotion:

  1. Public Relations (PR)

  • Shaping the company's public image

  • What it includes:

  • Handling media interviews & press conferences

  • Writing press releases (e.g., announcing a new cyber insurance product)

  • Responding to news about the company (good or bad)

  • Why it matters: A strong reputation = more trust = more customers.


  1. Promotions

  • Short-term campaigns to boost sales

  • Examples: "Buy health insurance this month, get 1 month free!"

  • Discounts for bundling home + car insurance

  • Goal: Create urgency to attract new clients.


  1. Advertising

  • Paid messaging to reach customers

  • Key decisions: Which media to use (TV, social media, billboards)? Hire an ad agency or do it in-house? How much to spend (and track what works)?

  • Big challenge: "Half my ads are wasted—but I don’t know which half!" (Hard to measure ROI).


  1. Sponsorships

  • Supporting events/orgs for brand visibility

  • Examples: Sponsoring a university's risk-management program

  • Funding a local sports team 

  • Why? Builds goodwill and name recognition.


  1. Market Research

  • Studying what customers want

  • Focus areas: Current trends (e.g., rising demand for travel insurance post-pandemic, Gaps in competitors' products (to create better ones), Customer complaints (to improve services)

  • Goal: Stay ahead of market needs.

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Insurance Sales:

  • Insurance Sales: The "Selling Team"

  • What they do: Work with marketing to sell insurance policies, Connect product developers with customer needs, Run special promotions (like discounts for new customers), Track what’s selling well (and what’s not)

  • Why it matters: Poor communication = Wrong products = Lost sales!

  • Example: If sales teams don’t tell developers that customers want "pet insurance," the company might miss out on a big market.

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Underwriting;

  • The "Risk Checkers"

  • Underwriters decide: Who to insure, What to charge, When to say "no"

  • Key Differences by Insurance Type:

  • Life Insurance

    • One-time check (can’t cancel the policy later)

    • Very strict (healthy people = lower premiums)

    • Centralized team (to avoid mistakes)

  • General Insurance (Car, Home, etc.)

    • Ongoing reviews (can adjust or cancel)

    • More flexible (e.g., raise car premiums after accidents)

    • Local teams (faster decisions)

  • Special Terms:

    • Target Risks:

      • Good targets: Healthy 30-year-olds (life insurance), safe drivers (car insurance).

      • Bad targets: Jewelry stores (theft risk), chemical plants (fire risk).

    • Stop-Lists:

      • "We never insure this!" (e.g., extreme sports for life insurance).

  • Why it matters:

  • Good underwriting = Fair prices + No nasty surprises when claims happen.

  • Example: Insuring a smoker as "non-smoker" = Big losses when they get sick!

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Policy Administration:

  • Life vs. General Insurance:


Life Insurance:

  • Policy is critical (must keep original documents)

  • Cannot be canceled by insurer

  • Used as loan collateral → Must be 100% accurate


General Insurance (Car/Home/etc.):

  • More flexible (don't always need original policy to claim)


New Policies:

  • Life insurance: Extreme verification (one error could cause big problems later)

  • All policies: Must look professional & be issued quickly


Ongoing Tasks:

  • Fixing errors in policies

  • Handling renewals

  • Special note for life insurance: Coverage only starts when first premium is paid

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Claims:

  • Life Insurance Claims:

  • Only one claim per policy (death benefit)

  • Must check carefully for:

    • Correct beneficiary (what if ex-spouse claims?)

    • Policy loans (need to deduct unpaid amounts)

    • Possible fraud (fake death certificates)

  • Usually handled by central experts


  • General Insurance Claims:

    • Huge variety (from lost phones to factory fires)

    • Most are small → Handled locally

    • Big claims need specialists (e.g., natural disasters)

  • All Claims Check:

    • Is it covered? (Liability) Example: Does "storm damage" include flood water?

    • How much to pay? (Quantum) 

      • Life insurance: Fixed amount

      • General insurance: Often negotiated (e.g., car repair costs)

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Reinsurance

  • Reinsurance: Insurance for Insurance Companies

  • What it is: When insurance companies buy their own insurance to cover extreme risks.

  • Why it matters: Financial Safety Net: Helps pay for massive claims (like natural disasters or 9/11-style events).

  • More Capacity: Lets insurers take on bigger risks (e.g., insuring a skyscraper).

  • How it works:

    • Insurer A sells a policy → Transfers part of the risk to Reinsurer B.

    • If a huge claim hits, Reinsurer B helps pay.

  • What policyholders should know:

    • You don’t need to worry about reinsurance—your insurer is always responsible for paying your claim.

    • Reinsurance just ensures your insurer won’t go broke paying big claims.


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Actuarial Support:

  • What actuaries do:

  • Calculate risks (e.g., how likely a 40-year-old is to die in the next 20 years).

  • Set premiums (price of policies).

  • Ensure the company has enough money to pay future claims.


Key Areas:

Life Insurance

  • Analyze death rates 

  • Project investment returns

  •  Required by law 


General Insurance

  • Predict long-tail claims (e.g., lawsuits that take years to settle)

  •  Reserve calculations (money set aside for future claims)

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Accounting and Investment:

  • What they do:

    • Track every penny (premiums, claims, expenses)

    • Chase unpaid premiums (so the company has cash flow)

    • Pay bills & claims accurately and on time

    • Invest wisely to grow company funds while keeping money safe and accessible

  • Why it matters:

    • Without proper money management, an insurer couldn't pay claims - even if they wanted to!

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Training and Development:

  • Their job includes:

    • Teaching new agents how to sell properly

    • Keeping staff updated on regulations

    • Helping employees get professional certifications

    • Maintaining training resources (libraries, online courses)

  • Key point:

    • Good training = Better service = Happier customers

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Key Persons in Control Functions:

  • These are senior managers approved by regulators to oversee:

    • Financial safety

    • Risk management

    • Compliance with laws

    • Agent behavior monitoring

  • Example:

    • If an insurance agent breaks rules, the "Intermediary Management" control person must fix the problem.

  • How This All Works Together

    • Accounting ensures there's money to pay claims

    • Training ensures staff know how to do their jobs

    • Control Persons make sure everything follows the rules

  • Real-world impact:

    • When you make a claim, these teams have already:

    • Made sure the company can afford it (Accounting)

    • Trained staff to process it fairly (Training)

    • Verified all rules were followed (Control Persons)

  • Bottom line:

    • While agents and claims handlers are the "face" of insurance, these support teams are the backbone that keeps everything running smoothly and safely.

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  1. Official (Legal) Classification

  1. Long-Term Insurance (Life & Retirement)

  • A - Life insurance & annuities

  • B - Wedding/baby insurance (rare)

  • C - Investment-linked life policies

  • D - Long-term disability/health coverage

  • E - Frontlines

  • F - Capital Redempotion 

  • G/H/I - Retirement/pension plans



  1. General Insurance (Everything Else)

  • 1-2 - Accident & health insurance

3-9 - Property coverage (cars, ships, homes, goods)

  • 10-13 - Liability insurance (car accidents, workplace injuries)

  • 14-17 - Financial protection (debts, legal costs, business risks)

  • Note: Some categories (like wedding insurance) are very rare in Hong Kong.

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2. How Insurance Companies Organize Themselves

  • A. By Department

    • UK Style: Life, Marine, Fire, and "Accident" (which includes everything else)

    • US Style: Life vs. Non-Life (then split into fire, marine, car, liability etc.)

  • B. By Sales Channel

    • Sold by agents

    • Sold by brokers

    • Sold directly (online/phone)

  • C. By Customer Type

    • Personal: Individuals/families

    • Commercial: Businesses

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3. How Insurance is Studied (Academically)

  • A. People Insurance

    • Life, health, accident coverage

  • B. Stuff Insurance

    • Homes, cars, shipments

  • C. Liability Insurance

    • When you're responsible for harming others

  • D. Money Protection

    • Business interruptions, loan defaults


4. Reinsurance (Insurance for Insurers)

  • Outwards: Your insurer buys backup coverage

  • Inwards: Your insurer sells backup coverage to other insurers



  • Key Takeaway:

  • These categories exist to help regulators, companies, and students understand insurance - but what matters most to customers is getting the right protection!

  • Example: When you buy car insurance, it's:

    • Legally: Class 3 (land vehicle) + Class 10 (liability)

    • Practically: Sold through an agent (Sales Channel)

    • Academically: Property + Liability insurance

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Size of Industry:

  1. Insurance Companies (as of 2021)

  • Life insurance specialists: 54 companies

    • (26 local Hong Kong companies + 28 foreign)

  • General insurance specialists: 91 companies

    • (60 local + 31 foreign)

  • Companies doing both: 19

    • (10 local + 9 foreign)


  1. Salespeople & Brokers

  • Over 89,000 licensed insurance agents

  • About 2,200 insurance agencies

  • Around 800 broker companies with 11,000+ staff


  1. Jobs Created

  • Total employees: 102,288

  • 76% work in life insurance (mostly as sales agents)

  • 24% in general insurance


  1. Money Flow (2020)

  • General insurance premiums: HK$59.9 billion

    • (Covers car, home, travel, etc. - about 2.2% of HK's economy)

  • Life insurance premiums: HK$521.5 billion

    • (Life policies, retirement plans - about 19.2% of HK's economy)


  • Key Takeaways:

  • Life insurance is much bigger than general insurance in Hong Kong

  • There are more sales agents (89,000+) than insurance companies (164)

  • Together, insurance makes up over 21% of Hong Kong's entire economy

  • Most insurance jobs are in sales for life insurance products

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1. International Presence

  • Total Insurers (2021): 165

    • Local (Hong Kong): 97 companies

    • Foreign: 68 companies from 21 countries (including 2 from Mainland China)

  • Why it matters: Hong Kong is a global insurance hub with diverse international players.


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  • 2. Market Share Breakdown

A. General Insurance (Car, Home, Health, etc.)

  • Top 10 companies control: 42% of market

    • By category:

    • Accident/Health: 55%

    • Car Insurance: 47%

    • Property Insurance: 30%

    • Liability Insurance: 38%

  • No single company dominates (all have <25% share)

  • B. Life Insurance

  • Top 10 companies control: 85.6% of market

    • Top 5: 64.7%

    • Top 1: 20.6%

  • Key difference: Life insurance is concentrated in a few big players, while general insurance is more spread out.

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  • 3. Industry Collaboration

  • Hong Kong Federation of Insurers (HKFI):

    • Represents insurers since 1988

  • Members (2021):

    • 86 general insurance companies

    • 52 life insurance companies

  • Role: Advocates for insurers, sets industry standards, and works with regulators.

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  1. Who Are Insurance Intermediaries?

  • They are the salespeople and advisors who connect customers with insurance companies. There are two main types:

    • Insurance Agents (work for specific insurers)

    • Insurance Brokers (independent advisors who compare policies from multiple insurers)

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  1. Licensing Rules (Key Change in 2019)

  • Before 2019: Intermediaries registered with industry groups.

  • After 2019: All must be licensed directly by the Insurance Authority (HK’s regulator).

  • Why? Tighter control to protect customers and ensure professionalism.


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  1. How They Work

  • Agents

    • Represent one insurer

    • Sell policies from their company

    • Common for life insurance

  • Brokers

    • Work independently for clients

    • Compare options from multiple insurers

    • Preferred for complex business insurance

  • Trend: More people now buy insurance directly online, but intermediaries still handle most policies (especially life insurance).

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  1. Why They Matter

  • Expertise: Help customers navigate complex policies.

  • Choice: Brokers offer unbiased comparisons.

  • Trust: Licensed intermediaries must meet strict standards.

  • Example: Buying car insurance? An agent can explain one company’s policy.

    • Insuring a factory? A broker can find the best coverage across 10+ insurers.

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  1. Industry Cooperation

  1. Industry Cooperation

  • All intermediaries (agents/brokers) share goals:

    • Maintain service quality

    • Protect market integrity

    • They collaborate through industry groups to uphold standards.

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Market Associations/Insurance Trade Organisations:

The Hong Kong Federation of Insurers (HKFI)

  • Role: Represents insurance companies in Hong Kong.

  • Key Work:

    • Promotes ethical standards and consumer trust.

  • Previously ran the Insurance Agents Registration Board (IARB) (stopped in 2019 when regulators took over).

  • Why It Matters: Ensures insurers follow best practices and protects customers.


2. Insurance Broker Groups

  • Two major associations for brokers:

    • Hong Kong Confederation of Insurance Brokers (HKCIB)

    • Professional Insurance Brokers Association (PIBA)

  • What They Do:

    • Advocate for brokers’ interests.

    • Provide training and policy recommendations.

    • Work with regulators to improve the industry.


3. Help for Claimants & Victims

  • Three key organizations:

    • Organization

      • Insurance Complaints Bureau (ICB): Handles disputes between customers and insurers.

      • Motor Insurers’ Bureau (MIB): Pays claims if a driver is uninsured or the insurer goes bankrupt. Funded by a small fee on all car insurance policies

      • Employees Compensation Insurer Insolvency Bureau (ECIIB): Covers worker injury claims if an insurer collapses. Funded by a fee on workers’ comp policies.


4. Safety Net for High-Risk Jobs

  • Employees’ Compensation Insurance Residual Scheme (ECIRS):

  • Helps employers who can’t get workers’ injury insurance (e.g., for dangerous jobs).

  • All workers’ comp insurers must join and share these risky policies.

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