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Early adoption of the LDTI accounting standard is worth a look

Forsikringsrådgivning og teknologi
IFRS 17 Solutions

By Sam Keller | July 21, 2020

There’s a potentially tasty carrot for U.S. life insurers that maintain progress on revised long-duration targeted improvements (LDTI) reporting.

When the Financial Accounting Standards Board (FASB) recently announced a further delay of a year in implementing the new generally accepted accounting principles (GAAP) standard for long-duration targeted improvements (LDTI) to (effectively) first quarter 2023, I suspect the instinctive response of many life insurers was “phew.” Totally understandable with everything else going on in the world right now.

Since FASB issued the Accounting Standards Update 2018-12 (ASU 2018-12, LDTI) in August 2018, insurance companies have been working diligently to implement solutions to comply with the new reporting requirements. These changes include revisions to the calculation of traditional contract benefit liabilities, amortization of deferred acquisition costs, measurement of market risk benefits and enhanced disclosures all-around. Many substantial changes to data, actuarial systems and processes are required to implement successfully.

But before insurers ease back on their preparations, they might want to consider a tasty little carrot that the FASB threw in as part of the announcement: If companies elect to early adopt and still comply with the previous effective date of Q1 2022, they will only have to restate one prior year, instead of two if they move to the new 2023 implementation date.

That’s an incentive definitely worth thinking about. And a decision on whether to take up the incentive really boils down to one issue.

The big bone of contention for the FASB, and the stated reason for the latest delay, was that many companies had indicated they would have had to take shortcuts to meet the 2022 implementation as a result of the COVID-19 crisis. So, if companies do pursue the earlier date, they will have to be able to do it to the FASB’s required level of rigor.

That will mean focusing on getting the implementation right — no shortcuts. But for some companies, the relief of needing to only restate the 2021 financial year may make this possible.

After all, insurers should already have been working through the data-granularity, reserving and actuarial-modeling requirements of the new GAAP standard with the 2022 implementation date in mind. A firm, senior-level commitment to that date, perhaps backed up by additional GAAP calculation engine technology support and some additional levels of process automation, could put it within reach and offer real benefits to early adopters.

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Director, Insurance Consulting and Technology

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