After announcing a proposed one-year deferral of the effective date for Targeted Improvements to the Accounting for Long Duration Contracts (LDTI) in June, FASB is expected to issue the final amendment soon to ratify the decision. This will push the effective date to January 1, 2023 for most public filers.
The delay certainly stems, in part, from the challenges the insurance industry is facing as a result of COVID-19. However, even pre-COVID, 66% of insurers stated that existing LDTI adoption timelines were either “challenging” or “extremely challenging” as reported by PwC in their Fall 2019 LDTI Readiness Survey. So clearly the delay also considers the data and system challenges inherent in the standard as well as the insurance industry’s desire to use LDTI projects as the driver for finance transformation initiatives.
What does this mean for Insurers?
Over our 20-year history of providing regulatory solutions, we’ve seen companies both squander and make the most of delays, so we’ve highlighted a few ways companies can use the extra time to benefit their LDTI projects.
Conduct a deep dive into data and processes
Across regulatory projects for revenue recognition (IFRS 15/ASC 606), IFRS 17, leasing (IFRS 16/ASC 842) and IFRS 9, data identification, standardization and centralization are often some of the most challenging project aspects. Compliance projects and the need they drive for more detailed data than previously required, often uncover a multitude of manual workarounds, legacy source system limitations and other data challenges.
It is no different for LDTI. Under the new standard there is a significant extension to the detail required for Disclosure reporting and the requirement to tie outputs back to the Financial Statements, while maintaining visibility and controls for audit purposes. Insurers and even actuarial system providers recognize that actuarial solutions alone are not enough to address the need for a finance-controlled environment to support the new standard. Using the extra time to identify all required data and to determine how to ensure it’s at the right level of detail while standardizing the timing of data flows is worthwhile and can greatly accelerate projects.
Starting from the disclosure reports and working backwards to determine the data you need to input can help prevent issues mid-way through projects.
Expand internal and external stakeholder education
Functions beyond finance and actuarial will be affected by LDTI’s strategic implications and the extra time could prove useful for educating the rest of the business on how to understand, support, and respond to business changes. This is especially true if an organization uses LDTI as a catalyst to review and change systems and business processes. Areas of focus may include the product and investment portfolio, asset and liability management (ALM), key performance indicators (KPIs), and strategy.
Insurers will also need to educate auditors and users of financial statements. Approaches will need to be documented and data persistence illustrated. As with any compliance change, the new accounting approach may result in changes to key KPIs which will need to be explained clearly. The allotted extra time will allow the CFO and wider finance department to better articulate why these changes are occurring and even model various scenarios to better understand the accounting approaches that drive favorable results.
This education effort, both for internal employees and external stakeholders could be even more challenging and time consuming if workers continue working remotely due to the ongoing COVID-19 pandemic.
Think longer term
Recent articles from consultancies and thought leaders in finance like McKinsey and others believe COVID-19 will accelerate digital transformations considerably – increasing the move to digital more in the last few months than we may have done over several years. Across industries, particularly in areas like insurance where tech investment, especially in the finance department, has lacked, COVID-19 has highlighted the need to automate and integrate data and processes.
LDTI is a perfect opportunity for insurance companies to secure budget to create an automated, efficient accounting and reporting process that reduces the need for manual intervention. This could include utilizing posting patterns that automatically create accounting events for calculation results and centralizing processes that may currently be completed in various end user computing (EUC) tools, like excel or access databases. CFOs need to look to automate as much as possible from the ingestion of cash flows into the actuarial systems all the way through to the posting of journal entries
The strategic potential for CFOs is significant. Finance leaders should be articulating the value of using LDTI as a driver for broader change. With the increase in actuarial data available, finance has the opportunity to not only harness new data points but bring together the organizational and data silos that have separated the Finance, Actuarial, and ERM teams.