FASB proposes a one-year deferral to the LDTI effective date: How will insurers react?

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In transition , PwC US Jun 10, 2020

The FASB’s June 10, 2020 Board meeting resulted in an announcement of a proposed one-year deferral of the effective date of Targeted Improvements to the Accounting for Long-Duration Contracts (LDTI) standard (ASU 2018-12) for all insurance entities. This means an effective date of January 1, 2023 for most public filers and provides relief to insurers dealing with ongoing public health and economic crises and their resulting impacts on LDTI implementation plans. For further information and a summary of the outcomes of the FASB Board meeting, please refer to PwC’s In brief publication.

Overview

While a pandemic has broad impacts on insurers’ operations, specific, related challenges that could impair companies’ ability to meet the LDTI adoption timeline include:

  • Inefficiencies from the workforce adapting to remote working norms (e.g., disruption to employee efficiency and/or ability to work, including impacts on systems, communication and collaboration approaches);
  • Reallocation of resources to respond to the more immediate impacts of COVID-19 (i.e., crisis response and associated risk management activities);
  • Pressure on engagement models established with external vendors and third parties that could jeopardized solution development and testing; and
  • Market instability driving uncertainty of the impacts of LDTI on KPIs, which undermines management's ability to take appropriate management actions ahead of adoption.

Based on PwC’s Fall 2019 LDTI Readiness Survey, the majority of insurers (66%) stated that existing LDTI adoption timelines were either “challenging” or “extremely challenging.” The proposed one-year deferral is therefore a welcome relief as insurers manage current response challenges in addition to existing implementation pressures.

 

The path forward

Insurers should take the time to re-evaluate their LDTI approach. They need to continue refining approaches that promote the effectiveness of new working norms and mitigate the disruption from COVID-19. They need to stay focused on meeting LDTI requirements. And, as part of their LDTI implementations, they should take advantage of cost synergies with wider enterprise initiatives.

 

Focus on LDTI delivery

  • Decision on early adoption: The FASB’s announcement also had a majority vote in favour of revising the transition date for early adopters to January 1, 2021 instead of the current transition date of January 1, 2020. This reflects feedback the FASB heard in its outreach that certain companies were on track to meet the current adoption date and that producing one year of comparables (rather than two) would significantly reduce workload and provide flexibility to defer adoption if implementation plans are delayed.

Insurers should carefully evaluate the pros and cons of early adoption. For example, keeping to the original adoption date would not increase already significant implementation costs, and could position early adopters as market leaders with stakeholders. Alternatively, to the extent insurers are not truly ready, any mistakes could lead to reporting or controls issues, resulting in lost credibility with stakeholders. Making an early call on this decision will be critical to all the items discussed below.

  • Executive understanding: PwC’s Fall 2019 LDTI Readiness Survey indicated that most insurers (61%) saw explaining the impacts of LDTI to senior executives as either “‘challenging” or “extremely challenging.” The market instability we have seen as a result of COVID-19 has exacerbated this issue. LDTI project teams should factor in more time to adequately present the impacts of LDTI under a range of scenarios and ensure management is fully aware of and has the ability to take appropriate actions to manage the standard’s impacts on business strategy. In addition, it may be necessary to spend additional time enhancing internal management reporting structures and determining how to explain results with the aid of business intelligence tools. Furthermore, insurers will need to re-evaluate the timing of any planned quantitative disclosures to external stakeholders.
  • Upfront design: One challenge of the new remote working environment is the ability to quickly develop and test system LDTI enhancements. Insurers should consider spending additional time working through functional and technical specifications to avoid misinterpretations that may result from less frequent team interactions.
  • Technology development: Vendors also are experiencing challenges adjusting to new ways of working. We have already seen slippage in LDTI release schedules from some vendors; they now require longer development cycles and/or remediation timelines for LDTI functionality. Insurance companies will need to factor these delays into project plans, allow a longer runway for build, test and dry run activities, and take a more hands-on approach (“virtually” that is) to address bugs and streamline issue resolution procedures.
  • Reporting processes: We expect that many companies will look at enhancements necessary for developing more robust, sustainable and automated workflows. LDTI project teams should use the additional year re-evaluating underlying LDTI workflows to ensure they meet any new performance and control expectations. Additional time also may be necessary to dry run processes, with greater engagement from teams like internal audit to validate any changes.
  • Accounting policy decisions: While we do not expect development of insurers’ LDTI accounting policies to significantly slow down, we do think that some insurers will use the deferral as an opportunity to further challenge and test potential accounting policy alternatives.
  • Resources: PwC’s 2019 Fall LDTI Readiness Survey reported that 77% of companies felt that they had insufficient actuarial resources, and roughly 45% reported gaps in IT specialists, data scientists and project managers. While the additional year may alleviate some of these pressures, it will not eliminate them. We encourage insurers to spend additional time sourcing appropriate resources to support their programs.

 

Maximize cost synergies

PwC’s Fall 2019 LDTI Readiness Survey showed that approximately 85% of insurers’ LDTI conversion efforts are woven into data infrastructure/systems initiatives taking place at the enterprise level. With a one-year delay, insurers should reconsider the need to differentiate between interim and future state. Specifically, the incremental effort to move from an interim state into a future state design may no longer be necessary considering future state design may well become achievable before the new effective date. The reduced need for converting interim solutions into future state designs may reduce costs and speed capability enhancements.

 

Integration with company-wide initiatives

Continue to enhance procedures to support new ways of working

  • Empower change agents: A project management office (PMO) is vital in ensuring an insurer’s LDTI program takes advantage of the year extension. Quickly reforecasting project plans and resource models, and using change management teams to provide clear messaging and unambiguous objectives to the project team, will be critical to maintaining forward momentum.
  • Embrace virtual: We are now working in a virtual world, and insurance companies should continue to deploy technology that supports and upskills their teams. Insurers that have deployed cloud valuation and finance systems have generally made good progress despite work from home limitations. In addition, insurers also need to continue to enhance effective communication channels, collaboration approaches, and project management execution. Virtual collaboration tools can simulate face-to-face interactions, capture creative thinking, record actions, seamlessly build / track work, and allow colleagues to share a smile. Continuing to increase LDTI project teams’ effectiveness and efficiency will have benefits from a cost and risk perspective, as well as in terms of the value the team can deliver to the business over an additional year.

In conclusion, the deferral by the FASB provides much needed relief during these unprecedented times. While it is a significant challenge to adapt to the new challenges they face, insurers also have opportunities to refine and optimize their LDTI implementation approaches and thereby reduce execution risk and provide greater benefits to their organizations as a whole.

 

To learn more about LDTI, please contact:

Matt Adams

Insurance Practice Leader, New York, PwC US

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Richard de Haan

Global Actuarial Leader, PwC US

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David Honour

Actuarial Principal, PwC US

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Don Seto

Partner, Capital Markets and Accounting Advisory Services, PwC US

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Kostadin Doukov

Assurance Partner, PwC US

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Ryan Jones

Assurance Partner, PwC US

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Paul Basso

Risk Assurance Principal, PwC US

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Brett Maher

Advisory Partner, PwC US

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John Brady

Assurance Director, PwC US

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Ailen Okharedia

Actuarial Director, PwC US

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Matt Adams

Matt Adams

US Insurance Practice Leader, PwC US

David Schenck

David Schenck

US Insurance Tax Leader , PwC US

Richard de Haan

Richard de Haan

Global Actuarial Leader, PwC US

Mary Saslow

Mary Saslow

Managing Director, National Professional Service Group, PwC US

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