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.
While a pandemic has broad impacts on insurers’ operations, specific, related challenges that could impair companies’ ability to meet the LDTI adoption timeline include:
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.
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.
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.
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.
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.
US Insurance Practice Leader, PwC US
Richard de Haan
Global Actuarial Leader, PwC US
Managing Director, National Professional Service Group, PwC US