Key Changes to Accounting for Long Duration Insurance Contracts under US GAAP

The FASB update to Long-Duration Targeted Improvements (“LDTI”) is now due to be effective January 2021.  This is a significant change for insurers reporting under US GAAP and will have major impacts data, processes and systems.  This was a change driven by users of financial statements and is keenly anticipated so it is unlikely there will be any delay.  Unlike IFRS 17 it is limited in scope and very specific but never the less insurers do not have much time to put solutions in place.

The key changes are designed to make insurer’s financial statements more comparable and transparent and hit four main areas:-

  • The measurement of the liability for future policy benefits is to be made more current by requiring regular updates for actual experience adjustments and changes to future assumptions. This is combined with a change in the discount rate used to one that now reflects the characteristics of the liability rather than the underlying invested assets.  Both the discount rate and cash flow assumptions need to be reviewed and updated at each reporting date.
  • There are now specific treatments for products that are deemed to included Market Risk Benefits (“MRB”). The definition of MRBs is going to be open to debate and care will need to be taken to ensure judgements are supported by auditors.  The MRB will need to be valued at fair value with changes in the insurance companies credit risk recognised in other comprehensive income.
  • The amortisation of acquisition costs will be simplified and deferred acquisition costs will be amortised on a straight line basis over the expected life of the policy. There will be no impairment testing of deferred acquisition costs and they will continue to be amortised as long as the underlying policy remains in force.
  • The disclosure requirements will be significantly enhanced requiring much more detail from insurers. This will include for example more information about inputs, judgements, assumptions and measurement methods together with liability roll forward reconciliations.

The standardisation and some of the simplifications will be welcome but never the less this represents a big change.  The bulk of the impacts will be felt in the actuarial area and investment will be required to update actuarial models.  This will be a good chance to look at consolidating valuation and projection models, potentially upgrading to new software and taking advantage of new technology such as cloud.  Beyond that there is also a chance to look at the overall finance technology and process landscape and upgrade the back office.  Given the pace of change this could be the catalyst to drive changes to catch the digital wave.   Key areas to think about that will be directly impacted by this change will be:-

Audit trails and controls of assumption changes and impacts on financials

Production of reconciliation and validation reports from granular detail

Management of more complex and data heavy month end processes

The need for more data storage to support granular financials

Control and work flow management of the process

An accounting rules and calculation engine with a granular subledger can be a key enabler in handling these areas.  With applications like Legerity FastPost now enabled on cloud and taking advantage of the latest in memory grid processing and open source coding, it is the perfect platform to support your compliance journey and be the first, and very big step, towards your digital transformation journey.

Contact Legerity to discuss any of these concepts in greater depth.

Adapting and implementing new accounting standards is complex, time-consuming and expensive.

Legerity’s FastPost platform provides a powerful rules-based engine to handle this increased complexity; with comprehensive data models and massive in-memory compute power – transforming Finance & Risk functions. Get in touch today to learn more.