Van Beach, Principal, Milliman.
The timeline dictated by the Financial Accounting Standards Board (FASB) Targeted Improvements to the Accounting for Long-Duration Contracts (LDTI) has a go-live date of January 2021, a fast-approaching deadline. With this in mind, insurers need to address these six hard realities to make sure they are ready to meet the new requirements:
- Methodology. Many companies are initially focusing on accounting policy, but too often in isolation. A desired approach may not be possible due to auditor concerns, data limitations, or LDTI vendor capabilities, among other constraints. Policy decision-makers cannot make decisions in isolation. Also, there is not enough time to fully evaluate all of the issues. Do the work to pick the right battles as to where you spend the time.
- Data. New data requirements mean that information technology (IT) needs to help. Get them involved early and often. Transition methodology options (e.g., full retrospective, historical transition date for modified retrospective, etc.) likely will be dictated in part by data availability. Ongoing valuation requires new data feeds as well. Start early with IT, get what you can ASAP, set the plan to get the rest, and develop a crisp view of how it will come together
- Calculations. With most companies using vendor systems, a huge dependency has been created. If your vendor has not already delivered LDTI functionality, contingency plans need to be developed. Using a vendor solution to provide only the LDTI calculations, process, and reporting, and then relying on existing systems for cash flow projections, may be an option. Waiting and hoping is not.
- Operations. Operational aspects of LDTI can’t wait for accounting policy to be finalized. Also remember there are multiple workflows that need to be addressed—transition processes, point-in-time valuations, roll-forwards and disclosures, unlocking processes, etc. Then you need to control it all. This work can’t wait for every decision to be made. Get an end-to-end project going now to hopefully find the operational issues early. Accept that the project won’t deliver the final answer. But it is much better than no answer.
- Governance. Factors are gone. Models and assumptions are in. If you haven’t established model governance before—it’s needed now. Assumption development processes also are required. If you use a closed system, don’t be complacent and think vendor-maintained code removes this burden—it doesn’t. It will look different, but the requirement is still there. In a big way. Establish the governance processes ASAP and start living with and using them even as LDTI models are still being developed.
- Resources. Even for the companies best prepared for LDTI, this is a big job. Few have the staff and the expertise to tackle LDTI and keep business-as-usual processes going as well. Remember there are limited resources among the consulting community and they are getting stretched across LDTI and International Financial Reporting Standard (IFRS) 17 projects, all of which are competing for many of the same skills. So again, choose your partner(s), start early, and secure the support you will need to be successful. Don’t assume the support you want will be there at some point in the future—secure it now.
What does it mean?
Limited time means that compromises are a given. Implementation will too often be strictly compliance-focused rather than strategic. Companies will need to be selective in where they spend their time evaluating methodology options. Multiple work streams will all need to move forward without perfect vision into the final state. Companies will need to make decisions without full information. High costs for controls and compliance, and suboptimal financial outcomes, are very real concerns.
Avoiding these pitfalls will require early action on multiple fronts and high levels of collaboration across internal and external partners. Insurers will need to be comfortable moving forward without perfect vision into the end state. Expert project management along with significant diligence and coordination amongst all parties will be required to deliver the LDTI final answer. A deferral of the implementation date by the FASB would offer an opportunity for clients to mitigate or address many of the negative impacts noted above—and there are many in the industry hoping for that opportunity—but until then, insurers need to live with the hard realities of the current LDTI timeline.