BLOG. 3 min read
Long-Duration Contracts Targeted Improvements and Impact for Insurers
August 1, 2022 by Josh Brown
In August 2018, the Financial Accounting Standards Board (FASB) issued Accounting Standards Update (ASU) 2018-12, Financial Services—Insurance (Topic 944), often referred to as long-duration contracts targeted improvements (LDTI).
The effective date of ASU-2018 for all SEC filers is January 1, 2023, with an option to early adopt. The effective date for non-public insurers is January 1, 2025.
Companies that write Life and Annuity contracts are impacted by the new guidance. Below are insurance contracts that are generally in scope for ASU 2018-12:
- Traditional Non-participating (non-dividend-paying) Life Products
- Life Contingent Limited-Pay Contracts
- Long-Term Care (LTC)
- Participating Whole Life
- Universal Life Products
- Deferred Annuities
Key changes introduced in ASU 2018-12 include:
- Updating Assumptions
- Standardizing Discount Rates
- Mandating a Fair Market Value Benefits Model
- Amortizing Deferred Acquisition Costs (DAC) on a straight-line basis
- Additional Disclosures
Opening GAAP equity may be computed differently than historically calculated. Some insurers may see a decrease in equity because premium deficiency reserves will be calculated differently and because the new standard requires companies to calculate reserves using current interest rates, which could be far lower than their historical values. Over the lifetime of traditional products, there is an expectation that insurers will see greater earnings volatility and lower equity volatility, but these may or may not happen in the short term.
Even after many years of contemplating the effects of LDTI, many in the industry still have a lot to learn about the coming changes. Insurers should think of these changes as an opportunity to modernize their technology systems, from investment accounting platforms to actuarial software to general ledgers. Insurers will need to reconsider their data infrastructure and core systems because LDTI will require them to modernize accounting processes.
The purpose of LDTI is to pave the way for more current and relevant information for investors, but the trade-off is added volatility. Volatility is introduced because assumptions are updated periodically under the new guidance, which introduces potential changes. Under the previous guidance, assumptions were locked in at issuance. Additionally, in certain circumstances, the insurer could use an amortized cost model. Under the new guidance, a fair value model is required, introducing volatility.
On July 14, 2022, the FASB issued a proposed Accounting Standards Update that would amend transition guidance for LDTI.
According to the FASB, some stakeholders told the board that applying the LDTI guidance to contracts that were derecognized because of a sale or disposal before the LDTI effective date likely would not provide information useful to financial statement users and could result in significant operability challenges for insurance entities to apply the guidance. Without an amendment to the transition guidance, an insurance entity would be required to reclassify a portion of the previously recognized gains or losses to the LDTI transition adjustment because of the adoption of a new accounting standard, according to the FASB.
The proposed ASU would amend the LDTI transition guidance to allow an insurance entity to make an accounting policy election to exclude certain contracts or legal entities from applying the LDTI guidance when they have been derecognized because:
- Of a sale or disposal before the LDTI effective date; and
- The insurance entity has no continuing involvement with the derecognized contracts.
The comment period for this proposed ASU concludes on August 8.
What does this mean for insurers?
Compliance can be complex. When new rules take effect, missteps that originate from technology shortcomings, lack of experience and improper review can lead to downstream fire drills or expensive re-work for the insurer. An insurance investment accounting partner with decades of insurance experience and industry-leading technology can fill those gaps.
Look for a firm with a platform that leverages AI technology for analytical insights, operational efficiency, and accounting and reporting flexibility. Expect them to bring a deep, credentialed team of tenured insurance-dedicated professionals to the table. This team should offer insurance accounting and regulatory reporting expertise across both public and private investments to help ensure reliability and accuracy, quality control review and filing assistance. Your partner must be able to quickly and thoroughly manage the implications and nuances of all regulatory changes to help you avoid risking wasted resources and reputational damage due to compliance mistakes.
With SS&C, you get deep insurance accounting and regulatory experience backed by modern AI-driven technology that is flexible and scalable. To learn more about what to expect from an investment accounting partner, read our "5 Things Every Insurer Should Expect From an Investment Accounting Provider" e-book.
Written by Josh Brown
Senior Director of Accounting Policy and Regulatory Reporting