New Underwriting, Claims Guidelines for IP Sustainability


The Australian Life Underwriting and Claims Association has released a white paper which focusses on addressing the ongoing sustainability of income protection insurance in the areas of financial underwriting and claims.

The paper, named IDII Financial Underwriting and Claims Better Practices, delivers recommendations made by a panel of industry representatives, following the May 2021 release of the Actuaries Institute’s DII Taskforce report, which included a reference product and a sustainability guide developed in response to APRA’s IP intervention.

ALUCA’s white paper highlights five key areas…which …would have the biggest impact on the issue of individual income protection insurance sustainability

ALUCA’s white paper highlights five key areas in its 67-page report which it believes would have the biggest impact on the issue of individual income protection insurance sustainability from the perspective of financial underwriting and claims.

The five key areas are:

  1. Income definitions and treatment – white paper section 7, where better practices include:
  • Clearly define Insurable Income, Ongoing Business Income and Passive Investment Income
  • Remove reference to “personal exertion” from calculation methodologies and from the policy conditions
  • Use the customer’s share of adjusted net profit as a basis for calculating a monthly benefit and also pre and post-disability income
  • Include an ongoing business income offset clause in the policy conditions
  • Clearly articulate the basis on which the monthly benefit will be calculated to the customer at every possible opportunity throughout the application process
  • Create a clear philosophy on passive investment income and ensure the underwriting process adheres to this
  1. Financial profiling, questioning and financial evidence collection – white paper section 8, where better practices include:
  • Profiling of insurable income, ongoing business income, passive investment income, income fluctuations, working hours, occupation and duties, gaps in employment, basis of employment and macro-economic factors
  • Obtaining appropriate information via the application process in all areas
  • Validating evidence provides more accurate assessments, particularly for more complex business structures
  • Underwriting and claims philosophies should be the same and align to the policy conditions
  • Standardised calculators to assist in achieving consistency in calculations.
  1. Significant income calculation adjustments – white paper section 9, where better practices include:
  • Depreciation: it’s a legitimate expense, it shouldn’t be added back in calculating insurable income
  • Income splitting should only be considered as an addback to the extent that the function doesn’t have to be replaced
  • SGC Superannuation should be paid to superfunds where possible
  • Self-employed superannuation payments could be included as an addback when calculating insurable income. However, where there is a super rider benefit or option on a policy for self-employed these payments should not be included in calculating insurable income
  • Policy conditions and underwriting and claims philosophies should be designed to address government subsidies provided
  1. What to consider financially should the industry consider a policy term expiry – white paper section 10, where better practices include:
  • Regular collection of information provides tighter control, assuming insurers can act on this information
  • Gathering information and reviewing the customer’s financial and occupation position at least every 5 years.
  1. Underwriting and claims solutions where there is a crossover between IDII and personal TPD – white paper section 11, where better practices include:
  • Methodologies for assessing a customer’s personal disability insurance needs should consider both long term IDII and personal TPD holistically
  • Consideration of a joint product offering combining IDII and personal TPD into one product.

The white paper panel also noted in its summary that as well as any appropriate amendments to approaches and practices, it was important that:

  • All professionals in life insurance underwriting, claims and rehabilitation roles are appropriately trained and qualified, with such qualifications being transparent to the wider community
  • There should be a transparent industry standard Competency Framework underpinning relevant training solutions (which has been addressed via ALUCA’s Life Insurance Competency Framework)
  • All practical work performed by life insurance underwriting and claims professionals should be measured against community standards and expectations, as well as legal and regulatory requirements

ALUCA’s Chief Executive Officer, Amanda McKernan, said she was excited for the paper to be released to the market and reinforced the importance of the next steps:

“It is important that the industry drives and adopts these recommended better practices to achieve industry sustainability,” said McKernan, who also emphasised the importance of life insurance professionals being adequately trained and qualified to perform their tasks which will help with implementing the outlined better practices.

Click here or below to access ALUCA’s IDII Financial Underwriting and Claims Better Practices white paper, which also includes a set of tables that summarise the variations that might be considered to a number of income-related definitions and other factors impacting underwriting and claims assessments and the risks (high, medium or low) accompanying the approaches taken to address what are considered to be sustainability-related issues.


  1. Looks like an interesting paper, and I shall read it in due course. In your report it refers to training of professionals in the life insurance industry who engage in underwriting, claims and rehabilitation, and that they be appropriately trained and qualified with such qualifications being transparent to the wider community. That’s an admirable principle and if anyone wants proof that it is drastically needed then I suggest a look at some of the transcripts from the Hayne Royal commission where certain insurers did not cover themselves in any glory.

    It’s probably not in ALUCA’s remit but a similar requirement exists for advisers. Risk advice is a full time job: it’s too complex to be added to the equally complex world of investment and superannuation. Risk advice must stand on its own!.

    When I joined this industry the then LUA offered, amongst other training courses, a 12 week Disability course which taught advisers the construction of an income protection contract and a number of other essential skills. It reinforced the learning by sending out advisers on practical exercises. In the early 90s, the then ALA/AFA launched a revamped course entitled Income Protection. I enjoyed moderating a number of those courses

    Somewhere along the line when the ALA centralized its administration and closed state offices the Board took a decision to abandon those training courses, including the income protection course. To the best of my knowledge there is no accredited income protection training course put on by any body that comes anywhere near the quality of that last income protection course, and there is nothing on offer from any university in that specific field.

    One of the outcomes of the Cooper case against CBA was that the judge reinforced with the CBA adviser that he, the CBA adviser, was considered by the public to be an expert. To manage that expectation, we must reinstate proper training for those advisers who seek to promote themselves as experts on income protection. This need has recently been highlighted by the introduction of complexity and severity in what must be an amazing interpretation of APRA’s requirements and the Reference document produced by the Institute of actuaries.

    The amount of structural variety between these contracts is a nightmare, and it’s a nightmare that will continue over the next three years in my view – this product development has only just started. Already one insurer, who obviously thought there was a competitive advantage in jumping the gun and releasing products before 1 October, has now responded to market pressure and has addressed issues such as claimants being forced to utilise sick leave credits before lodging a claim.

    I know there are many advisers out there who have the necessary knowledge and experience to be able to advise at an appropriate expert level on income protection. But, at the risk of being trolled, I continually see the work of other so-called advisers who should never be entrusted with the sale of an income protection contract.

    The risk industry is in a severe state of flux, driven by LIF and a complete overload on compliance. There are currently encouraging developments in technology which may simplify the process of client engagement and documentation preparation.

    That’s all very well, but if you make a recommendation now, for example, to replace any existing legacy income protection contract with one of the down-tuned offerings currently available in the interest of illusory savings, and you have not made, as ASIC would say, “additional reasonable inquiries” you will be appearing before the new regulatory body quicker than you can blink. Your PI insurer may not be impressed either.

    You would think this is an opportunity for the FSC to step in and come up with an appropriate income protection training course in consultation with advisers. But at the end of the day the FSC is just a lobby group for some product manufacturers and they probably don’t think it is in their interest to educate advisers to a higher standard of training on what is probably the most important life risk product available.

    It’s over to you AFA Board!

Comments are closed.