LDTI: Insurance accounting for long-duration contracts

John Bowers, Actuarial Product Director, RNA Analytics

The implementation deadline for accountancy standard ASU 2018-12, more commonly known as LDTI (Long Duration Targeted Improvements), is almost here.

Issued by the Financial Accounting Standards Board (FASB) in August 2018, LDTI defines new regulatory requirements for certain long-duration insurance products – demanding greater integration of finance and actuarial teams’ processes and systems; and introducing additional complexity in reporting.

With less than six months to go before the effective date for SEC filers of 1st January 2023, and a raft of other operational and regulatory challenges to grapple with in parallel, the window of opportunity is closing for life insurers in the US – particularly for those with a global footprint, and which therefore need to transition to IFRS 17 by the same date.

A challenging implementation

LDTI introduces fundamental changes to US GAAP calculations and reporting, and presents significant changes to the way companies value their obligations. At the same time, the new standard also brings with it a great many opportunities to vastly improve operations and processes, as the end-to-end finance process demands much greater efficiency.

The additional granularity required by the standard has a significant impact on the volume of data required of actuarial systems, as well as those of the accounting and finance departments – a process which should be automated wherever possible, to ensure consistency and reliability, in addition to supporting internal and external audit.

Analysts at Fitch Ratings warned at the end of May, that whilst they expected LDTI to have limited ratings implications for Fitch-rated life insurers, ratings could be negatively impacted if LDTI reveals a material weakness or risks previously not incorporated into its analysis, “which may exist where asset-liability management is less stringent than currently assumed”. The new standard could also impact ratings if it leads to changes being implemented that the ratings agency considers as adverse to a carrier’s business or financial profile.

Fitch also noted that the changes to actuarial and discount-rate assumptions are anticipated to bring about a considerable increase in GAAP liabilities at adoption, and greater volatility in reported earnings. “Insurers with longer duration liability profiles are expected to report material reductions in shareholders’ equity upon adoption, with the impact flowing through accumulated other comprehensive income (AOCI),” it added.

The deadline for LDTI implementation is the same as that for IFRS 17 outside the US (and while some carriers may be transitioning to both concurrently) there are fundamental differences in the frameworks between the two, as far as their impact on long-duration contracts is concerned.

That said, for some carriers, there could be synergies in an integrated implementation journey, particularly where process design, modelling, data and reporting are concerned. As Deloitte noted in its October 2019 Insurance Accounting Insights, Integrating Implementation for IFRS 17 and LDTI, “...the work companies do to prepare for IFRS 17 compliance may be able to be leveraged for LDTI to enhance efficiencies, increase cost savings, reduce resource requirements and, limit the amount of reworks and time needed to reconcile the results of the two standards".

As per the FASB's original intention for LDTI, the increased transparency produced will make it easier for analysts and investors to compare performance. At the same time, the changes could result in GAAP accounting charges and increased earnings volatility for certain businesses, the prospect of which as in some cases driven up consolidation activity.

Sector research published in April 2021 by Moody's noted the recent example of Allstate Corporation’s announced agreements in January and March 2021 to sell 100% of its life and annuities business in two separate transactions to Blackstone and Wilton Re for $2.8 billion and $0.2 billion, respectively. "Allstate has discussed its intention to pursue strategic actions on its book of business for years now, in Q2 2019 highlighting annuities’ drag on adjusted ROE and its initiatives to reduce exposure and improve returns,” it noted. "In the same announcement, referring to the deal with Blackstone, Allstate indicated that if rates were to remain at current levels, the drop in equity from LDTI implementation would have been more than the $3.1 billion GAAP loss from the transaction.”

Towards certainty

Whilst this new accounting standard is a considerable challenge, it must also be seen as a driver for positive change, as previously siloed actuarial, finance and IT functions have a once-in-a-lifetime opportunity to harmonize via the LDTI ‘roadmap’.

With transition at varying stages amongst those that fall under the standard’s scope, carriers are taking the time to consider how a compliance solution can bring about measurable benefits across finance and accounting, finding renewed value in subledger solutions that position their companies strongly in the age of digital transformation.

Insurers will, however, need to fully understand the strategic implications of these changes, to recognise the processes that will need to be addressed, and then respond, whilst managing cost and complexity.

RNA Analytics is driven to meet the challenges of the current and future demands on insurance companies by the increased demands of new standards and regulations, as well as the desire by boards and investors to gain better insights into the risks and their impacts on the business.

We aim to change the way in which risk and actuarial software is used across the business and look to provide a platform that can be utilized by all departments – from product development, pricing, financial and regulatory reporting, right through to the risk function.

As a result of Covid-19, the effective date of ASU-2018 for SEC filers was extended to 1st January 2023, with an option to early adopt. The effective date for non-public insurers is 1st January 2025.

Get in touch with our consultants for impartial, expert and tailored advice on LDTI, as well as LDTI, on IFRS 17, C-ROSS, USGAAP PBR and Solvency II, to help you transition with confidence today, for more certainty tomorrow.