LDTI
Everything you need to know

Long duration targeted improvements (LDTI) is viewed as the biggest insurance overhaul in FASB accounting in several decades.

But what exactly is changing and how are companies looking to maximize project ROI?  

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Understanding the standard

What is LDTI?

The changes stemming from FASB's ‘Targeted Improvements to the Accounting for Long Duration Contracts,’  otherwise known as LDTI, are significant and will require changes to systems, processes and data.  For public entities, the effective date for compliance will be fiscal years beginning after Dec 15, 2020. For all other entities it will go into effect for fiscal years beginning after Dec 15, 2021.  With a transition date of January 1, 2019, the window is quickly narrowing for public entities to verify they are collecting sufficient data for transition. 

Final guidance on long duration contracts

Who does it impact?

Insurance entities that issue long duration contracts including universal life type contracts, whole life and term life.  LDTI applies to US GAAP reporters, including dual IFRS / US GAAP reporters. 

What is the scope?

Following on the heels of IFRS 17, LDTI will highlight the lack of investment in and flexibility of finance systems that have been in place over the last few decades.  A survey by PWC found that over 75% of impacted insurers expected some level of change to their companies 3 year business plan as a result of LDTI requirements. 

The GAAP Long Duration Targeted Improvements (LDTI) is a significant change in accounting for insurance companies.  The targeted changes to the current reporting model affect accounting for companies that sell long-duration products such as life insurance, disability income insurance, long-term-care insurance, and annuities.  LDTI will have comprehensive impact on affected Insurance Companies’ data, systems, controls and processes used to measure and report financial results.
Matthew Clark, Principal, Deloitte Consulting LLP

What's Changing?

For many Insurers, the core requirements of LDTI will highlight the lack of investment in and flexibility of finance systems that have been in place over the last few decades.

Specific changes include things like, assumptions for the liability for future policyholder benefits, Deferred Acquisition Cost Amortization (DAC), Market Risk Benefits (MRBs) and extensive disclosures.

There are also more wide-reaching, general changes which include the need to explain increased volatility, access a much deeper level of data granularity and manage a significant increase in the disclosures required by the standard.

Read more about what's changing.

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Implications for Insurers

As part of Insurers' LDTI initiatives, many are considering addressing shortcomings in their existing system infrastructure.  This could include changes to upstream systems, foundational systems, data flows or business and control processes. Investments required to address regulatory initiatives are often simply too great not to expect resultant business improvements in the quest to reach compliance and beyond.

"The significance of the effort to implement the new standard cannot be overstated. Changes will be required to an entity’s systems, processes and internal controls. And new data will need to be collected and organized differently.  Many entities have made progress toward implementing the new standard, but many still have significant work to do ahead of adoption."

-Jennifer Austin and Alan Goad, Department of Professional Practice, KPMG LLP

 

KPMG_Long Duration Contracts_coverKPMG's Long Duration Contracts Handbook provides a detailed look at the scope of the changes brought about by LDTI.  

Get the Handbook

 

 

Lessons Learned: 6 takeaways from IFRS 17

  • 1 Planning and preparation takes longer than you think. Time needs to be dedicated to interpreting the standard and articulating requirements and policies that may be unique to different companies. 
  • 2 Qualified resources may not be abundant given that everyone is needing the same expertise.
  • 3 Satisfying the need for granular data will be a challenge, especially if several legacy or siloed systems are in place. 
  • 4 The pace of progression is much quicker when there is close collaboration between actuarial, accounting and IT teams.
  • 5 The flexibility of IFRS 17 solutions is proving to be an essential part of successful projects. Pay special attention to solution flexibility during evaluations.
  • 6 Many insurers doubted they would see value from IFRS 17 initiatives. This thinking has shifted with over 90% of insurers believing they will benefit from IFRS 17. 

Deloitte outlines keys to a successful LDTI implementation

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A way forward

Addressing these challenges will likely require more than just a change to the actuarial environment. This is likely why many Insurers are looking at LDTI as a chance to take a holistic look at finance architecture improvements to both comply with the new standard and position their organization for the future of digital finance. 

Swiss Re Corporate Solutions rely on Aptitude Software's subledger technology and finance calculation engine to enable and support growth in their global footprint. The currently installed Aptitude software solutions have allowed them to centralize accounting data, address requirements for multi-GAAP reporting, and it will extend its footprint to address the latest regulatory insurance industry requirements. The resulting front-to-back data lineage will offer multiple benefits, such as a streamlined close process and access a fully integrated financial processing architecture.
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Introducing the value of a subledger

A subledger is a database or book of accounts used to store a detailed subset of double entry accounting transactions. A subledger contains data at the lowest most granular level – and feeds entries into general ledger(s) (cloud or on premise), for accounting and reporting – and also feeds a data foundation into BI tools, AI and ML tooling.

A subledger is a core Finance Infrastructure component for many multi-national companies.  For Insurers,  subledger technology can enhance and replace manual accounting processes, consolidate disparate data sources and relieve overburdened General Ledgers. A subledger is the foundation for an efficient Finance Architecture and a solid control environment.

 

 

Benefits of using a subledger for LDTI

  1. Consolidation & Efficiency Bring together disparate systems

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  2. Finance certified control Satisfy disclosure reporting needs and the requirement to tie outputs back to financial statements.

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  3. Centralization of accounting policy Avoid generating accounting out of multiple systems.

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  4. Provide Insights to the business Granular data for more informed business decisions.

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  5. Achieve compliance and beyond Drive holistic business benefits and better ROI.

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Market Perspectives

Over the past few years we’ve seen significant changes to accounting rules both Internationally and in the United States. These changes increasingly require an overhaul to core finance and accounting systems in order to provide the level of detail, disclosures and financial control demanded by the regulations.  The Aptitude Accounting Hub (AAH) has the opportunity to serve a market need for a subledger which can both address current and future industry specific accounting changes like IFRS 17 and LDTI and the potential to deliver additional business benefits including centralized accounting, financial control and insights to the business.


David Fourie, Insurance Financial Practice Lead, KPMG
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