Tracking progress with LDTI

The introduction of the LDTI standard represents a significant change in how US insurers, particularly life insurers, measure and report long-duration contracts. As the deadline for smaller filers approaches, John Bowers, Actuarial Product Director, RNA Analytics, reviews the challenges and resources involved in implementation thus far.

The implementation deadline for accountancy standard ASU 2018-12, more commonly known as LDTI (Long-Duration Targeted Improvements), arrived in January 2023.

Although presented as a series of modifications to former guidance, LDTI in fact represents the most significant change to insurance accounting under Generally Accepted Accounting Principles (GAAP) in the United States in at least twenty years, according to the American Academy of Actuaries.

Issued by the Financial Accounting Standards Board (FASB) in August 2018, LDTI defines new regulatory requirements for certain long-duration insurance products – demanding greater integration of finance and actuarial teams’ processes and systems, and introducing additional complexity and frequency in reporting. The new rules became effective on 1 January 2023 for SEC filers, while SEC filers that are smaller reporting companies, and all other companies adopting LDTI, are working towards the effective date of 1 January 2025.

Implementation challenges

Among the key issues faced by insurers falling under the scope of the new rules are the measurement of insurance liabilities. LDTI requires insurers to update assumptions used to measure insurance liabilities at least annually, and to recognize their impacts in financial statements. This differs from the previous method where assumptions were often locked in at the time of policy issuance. This has been a considerable challenge for many insurers, which have needed to enhance their actuarial and financial reporting processes to handle these more frequent updates – and store the extra data.

Discount rate changes have also posed challenges to insurers as the new rules mandate the use of a standardized discount rate tied to high-quality fixed-income instruments, which could result in significant changes in the reported value of insurance liabilities. In addressing this, insurers have needed to adjust investment strategies and reporting processes.

LDTI also introduces new requirements for measuring market risk benefits, requiring insurers to develop new methodologies for their measurement, involving complex new financial models. In my view this is the most complicated aspect from the actuarial modelling perspective.

Further, the new standard requires more detailed disclosures about the nature of insurance contracts, the assumptions used, and the potential risks – demanding a complete overhaul for some insurers of financial reporting systems.

The role of software in addressing many of these challenges cannot be understated. The challenge is compounded when you consider the volume of data and systems integration required of the task, and the adoption of integrated software solutions that connect actuarial and accounting data is addressing many of the operational challenges that insurers face with LDTI implementation.

Contrasting IFRS 17 and LDTI requirements, LDTI places a much larger requirement on the liability CF calculations, with every reporting period requiring a projection of all policies from inception. IFRS 17 instead only requires updated projected CFs and a rollforward based on actual CFs over the reporting period.

Platforms for LDTI must therefore allow for seamless updates to assumptions and real-time data integration, ensuring that the detail on financial statements is correct, current and consistent – something that legacy systems and processes have simply not been equipped to handle. Frequent updates to assumptions also require highly sophisticated and robust modelling tools with the ability to quickly run scenarios, and adjust to new information; whilst automated reporting further supports compliance.

Implementation costs

At this stage in the LDTI timeline, the financial and human capital required to implement LDTI has somewhat crystallized.

As we know, LDTI is as much an IT project as it is actuarial. According to a survey carried out by KPMG for its 2023 Benchmarking LDTI Implementation report, some 40% of insurers replaced their databases while 36% replaced their actuarial valuation systems, and 21% their finance/accounting systems in preparation for the rules.

KPMG’s survey also showed that 24% of the 2023 adopters had more than 51 full time equivalents dedicated to the implementation project, while only 8pc of the 2025 adopters had a similar level of internal resources, and thus a greater use of external resources to work on the project.

Some 50% of the 2025 adopters reported “significant or extensive use” of external resources compared with 28% of the 2023 adopters – and while it found similar trends between the cohorts with respect to areas where insurers used external assistance, the need for actuarial support came out top.

In terms of cost, for the early adopter respondents to KPMG’s poll, the majority budgeted up to $20 million, with the average cost thought to come in at $26.4 million – not far off the $27 million budgeted by the 2025 adopters – though time will tell if these come in on budget.

According to the National Association of Insurance Commissioners’ (NAIC) US Life and A&H Insurance Industry Analysis Report, there were 739 life, accident and health insurers at year-end 2023, with the United States home to 12 of the world’s largest life insurers, according to S&P Global.

Large or small, insurers that fall under the scope of the new rules have faced numerous challenges and costs in implementing the standard. Only time will tell if the original objectives of LDTI will be achieved.