Meet LDTI – IFRS 17’s ‘little American brother’

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The International Accounting Standards Board (IASB) issued IFRS 17, the international accounting standard for insurance contracts, in 2017. And it has been keeping the global insurance industry busy ever since. In 2018, the US Financial Accounting Standards Board (FASB) followed by issuing Accounting Standards Update ASU2018-12, Targeted Improvements to the Accounting for Long-Duration Contracts – better known as LDTI – currently effective Jan. 1, 2022.

While IFRS 17 applies to all insurance and reinsurance companies, mutual insurers and subsidiaries of banking groups, LDTI applies to all public and private US companies that have certain long-duration life insurance contracts in the US market. Since many of the requirements of LDTI are similar to IFRS 17 but not the same, you could think of LDTI as IFRS 17’s little American brother.

Hidden Insights - Meet LDTI - IFRS 17’s little American brother

Hidden Insights: Meet LDTI – IFRS 17’s "little American brother."

LDTI introduces targeted improvements for long-duration insurance contracts in these four areas:

  1. Assumptions used to measure the liability for Future Policy Benefits (FPB) for traditional and limited payment contracts.
  2. Measurement of Market Risk Benefits (MRB).
  3. Amortization of Deferred Acquisition Costs (DAC).
  4. Disclosure, which introduces new requirements such as liability roll-forwards and information about significant inputs, judgments, assumptions and methods used in measurement.

The principles of these targeted improvements introduce substantial changes compared to the current US General Accepted Accounting Principles (GAAP). These changes increase the complexity of data requirements, data storage and calculations, as well as the scope and processes required to produce disclosure requirements. They also require insurers to transform or modernize their capabilities to support an end-to-end process that effectively fulfils LDTI requirements, which in turn requires aligning actuarial, accounting, General Ledger and reporting systems. So most insurers should plan for significant technology transformation.

Buy vs. build

But should you buy or build? This is one of the earliest and most significant decisions companies will make on the journey to LDTI compliance. Pursuing the “build” path provides a sense of control. But if unprecedented challenges (such as the COVID-19 pandemic) arise, maintaining the organization’s focus on application development can be extremely difficult. Building it on your own also requires your company to keep track of all existing requirements, and to anticipate and prepare for future changes. Plus, it introduces the risk of not being able to successfully complete each element required for an end-to-end process.

Based on my conversations with insurance clients, most seem to prefer either the “buy” strategy or a hybrid strategy that allows them to mix internally developed components with external solutions.

Tackle LDTI with proven technology

To reduce technological complexity, insurers might want to use existing tools and technologies while filling LDTI gaps in their IT, actuarial, and finance landscape. This is an approach that addresses the full end-to-end LDTI process. Companies will also benefit from additional LDTI-specific calculations being performed at a detailed level, a data repository containing input and output data at a granular level, subledger posting and a dedicated (regulatory defined) disclosure mechanism. Advanced analysis of the input data and calculation results (such as the source of earning analysis), attribution analysis due to assumption changes and reconciliation between financial reports also deliver considerable benefits to users. Plus, companies can also push results to external reporting tools, if required.

Benefits of an integrated solution approach

There are four direct business benefits from using an integrated solution for LDTI you should be aiming at:

  • Accurate financial statement results and disclosures within the reporting timeline.
  • Increased granularity for management information.
  • Transparent, auditable approach for end-to-end processes.
  • Reduced ongoing operational costs.

But for many, these benefits are just the beginning. A single platform for risk and finance analytics and reporting ensures consistency in common data, enables comparability of data and eases the reconciliation of results. It also fosters closer collaboration among IT, actuaries and accounting staff.

Why act now?

The implementation deadline set by FASB for public companies currently is Jan. 1, 2022, with early adoption permitted. Although, it was already tentatively decided to defer LDTI’s effective date by another year. While this deadline may seem distant today, most analysts and insurance companies are moving with urgency now because the changes are widely considered to be the most significant in decades. Stakeholders already want to know the impact of these changes on the financial position of their companies. They are looking for estimates soon, recognizing that the new standard will require substantial changes in the IT environment.

For LDTI, you should expect similar implementation timelines as for IFRS 17, given the broad range of impacts on current legacy systems, such as:

  • Requirements for granular data to be captured at an enterprise level.
  • New calculation requirements in FPB, DAC and MRB.
  • Additional processes to integrate actuarial and finance workflow.
  • New accounting processes, including reconciliation, attestation, disclosure and management reporting.
  • Governance requirements for transparency and oversight.

Just as important, once all these changes are made, systems will need to be tested and run in parallel for at least several quarters.

Waiting is not an option

And by the way, FASB did not postpone the effective date of LDTI due to the current COVID-19 pandemic at the time of this article’s completion. But even if the regulation is delayed, many insurers have embarked on the LDTI journey while focusing on business continuity efforts.

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About Author

Thorsten Hein

Principal Product Marketing Manager

Thorsten Hein is a Principal Product Marketing Manager in the Risk Research and Quantitative Solutions Division at SAS Institute. He specialises in global risk management operations insights in both banking and insurance, focusing on risk and finance integration, IFRS, Solvency regulations and regulatory reporting. He helps risk management stakeholders to go beyond pure regulatory compliance and drive value-based management to maximise business performance, using his wide experience to deliver both business relevance and technical coherence.

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