LDTI heralds new dawn for carriers

By John Bowers, Actuarial Product Director, RNA Analytics

In a very short time, the re/insurance industry will reach the implementation deadline for one of the most significant changes in accountancy practice in decades. Whilst we consider that the majority of carriers will be ready for the new rules, and that the considerable modifications required will ultimately benefit the industry, the market will not cross the finish line without considerable effort and investment; and in some cases an existential shift in strategy along the way.

With less than four months to go before the effective date of 1st January 2023 for SEC filers among re/insurers operating in the US, accountancy standard ASU 2018-12, or LDTI (Long Duration Targeted Improvements), radically alters the way affected companies value their obligations.

LDTI sets out significantly different regulatory requirements for certain long-duration insurance products – necessitating a far greater integration of finance and actuarial teams’ processes and systems; and introducing additional complexity in reporting among carriers that write life insurance or annuity contracts.

Unlike current GAAP accounting rules, the new standard requires assumptions around liability to be reviewed – and potentially updated – annually. Discount rates requirements are different, as are the requirements around disclosures. In short, LDTI requires a radical rethink of the end-to-end modelling process. All these changes create – and demand – a great deal more complexity, data, and a much closer integration between the actuarial, IT and accounting function; successful implementation simply cannot be achieved without that high degree of collaboration.

Whilst it’s true that re/insurers that fall under the standard’s scope have been given some reprieve in the timetable for LDTI due to the pandemic – and we consider that most carriers will meet the extended deadline, a successful implementation will depend on the right use of a number of tools, to manage all this extra complexity and data; not to mention the costs.

Companies falling under the scope of the new rules have largely spent the last two years creating and implementing their LDTI gameplan, with varying approaches being taken, according to the degree to which the exercise is considered to be about box ticking at one end of the spectrum, or at the other, a once in a lifetime opportunity to digitise and improve. Key to efforts, in either case, are technology and collaboration – the two playing a symbiotic role in successful implementation.

Actuarial models are a central element of the end-to-end LDTI reporting process, with the underlying technology and systems pivotal to its performance. By extension, actuaries are placed at the very heart of the company’s success – from ‘go live’ onwards.

Our own work with re/insurers tells us that the path of implementation has not been a linear one – with a high degree of reprioritisation along the way, as interpretation of the rules has evolved, and as the changes reveal new – and sometimes perhaps unwelcome – information about operating models. Because of the breadth of change involved in the new standard, implementation has already resulted in shifts in the insurer landscape. Beyond the investment needed for compliance itself, the standard has raised concerns around the prospect of increased earnings volatility, and is already driving up consolidation activity in the market. On the upside, LDTI lays the foundations for some players to reposition themselves through M&A, or other strategic opportunities that emerge as market players respond, and carriers opt to spin off operations that deemed no longer central to strategy.

For all these reasons, we believe an agile approach will continue to garner the most successful outcome – regardless of whether the exercise is considered one of compliance, or of digital, and, ultimately, business improvement.

Either way, the LDTI implementation exercise is exceptionally difficult without the right tools, skills and knowledge.

Like many other industries, the insurance industry has also been impacted by the Great Resignation – the latest in a series of pandemic-related events that threaten the continuity of business. We see this lack of staff – and knowledge – retention as one of the key issues for carriers in the final furlong before they reach the finish LDTI line.

As the January implementation deadline draws near, it is worth pausing to consider the original goal of the new standard, when it was released by the Financial Accounting Standards Board (FASB) in 2018: to increase transparency for analysts and investors in the industry. In most cases, the sweeping changes brought about by LDTI present the opportunity for previously siloed actuarial, finance and IT functions to achieve a transparency, and harmony, that can be leveraged by carriers, and the market alike, in an era of seemingly increasing uncertainty.