Pitfalls to avoid in your LDTI implementation
September 29, 2021
Lessons learned as the first cohort of insurers work to meet the new FASB standard
Do you hear something that sounds like gnashing of teeth and the furious clacking of keyboards emanating from around the country - from Hartford to New York, Arizona and Texas? That may very well be the sound of insurers grinding through their work to manage the most significant accounting change to hit the industry in some 40 years, an accounting change known as LDTI.
The insurance industry is in the thick of implementation work to meet the disruptive and data-intensive Financial Accounting Standards Board change known as the Long-Duration Targeted Improvements (LDTI) standard. It would be difficult to overstate the amount of assessment, analysis, implementation, dry runs and careful communication created by this standard.
We estimate that LDTI, which changes how long-duration insurance is valued and disclosed in the financial statements, will likely cost the industry in excess of $2 billion to implement.
Most Securities and Exchange Commission (SEC) filers, who have a deadline of 2023, are already deep into their implementation. Non-SEC filers have a later deadline of 2025, and can benefit greatly by learning from the experiences of those who are further along. The second cohort can learn best practices--and sidestep the traps--that early adopters have already discovered the hard way.
At PwC, we have been working side-by-side with 2023 adopters, and have observed the issues and challenges that arise and how technology is being used to smooth the path. Here are eight pitfalls to avoid to help minimize the cost and disruption to your business
- Using a manual approach to compiling data - LDTI will require a significant increase in the amount of information you need to analyze and disclose--from your actuarial calculations to your reporting out to investors and other stakeholders. Building manually produced data sets in spreadsheets and sending them across the company is a recipe for inefficiency and version control issues. Companies’ communications naturally find their own path: emails, texts or chat and the myriad other communications channels we use in our modern life. Unless you establish automated and well-controlled platforms up front, you will struggle. You need a tool that can enable a single data source, and create a strong controls framework.
- Using a variety of bespoke data sets - If your actuaries and finance teams are all using their own data parameters, you will have created more work for yourself further down the road when the data will need to be standardized and reconciled. This can be anything from the terms you are using, to the time series to the calculation methodology. This tends to arise if each team pulls their own version of the truth from the policy administration systems or data warehouses. Come up with data governance standards up front, and you will save yourself many headaches.
- Changing your processes without updating controls - Once you create new processes to meet the standard, your controls will also need to be updated. You may have to go one or two levels deeper than you go with your controls today. There will be the use of historical data you didn’t have to use in the past; your actuarial process will be different. For instance, if today you reconcile your administration system data to your general ledger data, you might do it at an aggregate level. Now you will likely need to perform this at the cohort level, based on the issue date of the policies, for instance. You will need to validate that your valuation system contains complete and accurate data at the cohort level. All of this creates new controls processes.
- Not maintaining an audit trail. When controls are added, deleted or updated as you go through your implementation, remember that you later may need to know why those changes occurred. There are tools that can help. One example is the Workiva platform, where you can note why a control or process changed or why a previous control or process was deemed insufficient. You or a colleague may want to know the logic behind a prior change. One of the Workiva platform’s strengths is that there’s an audit trail. You will see who made changes, when they were made and why they were made. It’s a documentation exercise. This becomes critical as so many insurers are opting to upgrade actuarial and finance technology platforms as they work to manage the LDTI change. Your process may have changed simply because the data needs to be recorded in a new way in a new system. In Workiva, there is a snapshot function that allows you to compare the current version to one from an earlier date.
- Underestimating the work involved. Make sure you have people assigned who will be making the LDTI transition a priority in their job. Once you fall behind, it’s tough to catch up. The first cohort of insurers had the benefit of the deadline being pushed back twice. LDTI mandates were originally supposed to go live January 2021, before the FASB pushed it back twice. It is unlikely the standard will be delayed again. From what we have seen, some 2025 adopters haven’t even started thinking about it. What will happen if you delay? Put simply, it will cost you more money. And you could potentially miss out on the opportunity to modernize your financial and actuarial process as part of the implementation, as you will not have time to be thoughtful. As of 2020, $380m had been spent on LDTI implementation, according to the 2020 PwC US GAAP Long Duration Targeted Improvements survey. By contrast, 2023 filers had on average spent $20m (two thirds of their budgets) while 2025 filers had spent $5m (one third of their budgets).
- Missing or lackluster communication to stakeholders. Companies should not delay in working on how to communicate the change to the market. What are the drivers of performance once the change is implemented? Your message needs to be refined. In the runup to the new change, you will want to soften the ground by explaining results in the current state, and how they are expected to change under LDTI.
- Lack of buy-in from the top. Your top management needs to understand the level of effort required for the implementation project. People who don’t do the work underestimate the amount of analysis, data issues, system upgrades and implementation challenges involved. They need to be educated early about the amount of funding needed. This is not the time to take funding away. PwC has benchmark data around what other clients have spent on their efforts. You can use this data to see if you are falling behind your peers and determine if there is a need to allocate more resources.
- Missing milestones. You should have milestones set up in advance so that you know you are moving through the project in time for the ultimate implementation deadlines. You should have timelines for an impact assessment, your accounting policy decisions, and your implementation--which includes building the technology solutions, testing and dry runs. There are also plenty of secondary impacts to consider, for example, planning and forecasting, adjusted operating income and hedging.
Tools are evolving and improving all the time, so you need to stay current with the innovations. Bridging to the new LDTI world will take time, focus and organization. With the right plan and the right tools, you can move through the transition with clarity.
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