U.S. GAAP's Long Duration Targeted Improvements | Chris Murphy

Complying with changes in accounting standards is fraught with complex requirements for insurance companies. In this Inside RGA Q&A, Chris Murphy, Senior Vice President, Global Projects, Global Valuation, discusses RGA’s efforts to comply with the U.S. Financial Accounting Standards Board’s adoption of ASU 2018-12.

Called “Targeted Improvements to the Accounting of Long-Duration Contracts” – or LDTI – the requirements go into effect for RGA and other large (re)insurers on January 1, 2023, while other insurance companies have until 2025. Chris shares what these regulations mean for (re)insurers, key challenges insurers face, and recommendations for achieving compliance while limiting business disruption.

What are the main changes resulting from LDTI?

The changes address four topics:

1. Liability for Future Benefits (LFPB) – require insurance companies to use their current best estimate assumptions instead of conservative assumptions locked in at contract issue
2. Deferred Acquisition Costs (DAC) – provide a simplified and consistent approach across all products
3. Market Risk Benefits (MRBs) – introduce new accounting terminology for some financial guarantees provided by insurance companies and requires greater use of fair value methodologies
4. Disclosures – require more information about reserve calculations, including roll forwards and discussion of key inputs, judgments, assumptions, and methods used

For insurers, what are the pros and cons of implementing LDTI?

The introduction of LDTI requirements offers positive changes, which include:

• Using best estimate assumptions as the calculation basis to provide a more current view of the value of liabilities, allowing better alignment between external accounting and internal management reporting
• Providing additional disclosures to offer more useful business performance information for external account users
• Introducing a simplified approach to calculating deferred acquisition costs, which leads to more transparent explanations of earnings, particularly for external account users
• Installing significantly less complex requirements than IFRS 17, the global standard for insurance contract accounting

Conversely, complexities introduced by LDTI include:

• Complicating the reserve calculation by incorporating historical cash flows
• Implementing a major accounting change amid pandemic-related disruptions – particularly challenging for companies with global operations
• Making efforts to explain and understand earnings much more challenging than under the current U.S. GAAP requirements
• Necessitating education for preparers and users of accounts, including investors, rating agencies, investment analysts, board members, and senior management

What are the most significant LDTI compliance challenges?

While described as “targeted improvements,” the changes are significant and can be challenging to implement. Adhering to the new standards can require a comprehensive review and updates to most U.S. GAAP valuation and financial reporting processes. Additional considerations include whether the underlying IT infrastructure can support more valuation runs and whether those runs can meet reporting timelines.

Besides the technical challenges of meeting compliance requirements, companies also need to consider other processes that use financial reporting, such as strategic planning, remuneration, capital planning, reinsurance, and taxes. Potentially most importantly, companies must implement effective change management strategies, including providing appropriate training across the organization.

How would you describe RGA’s experience with implementing LDTI changes?

Establishing key accounting policy decisions early is essential, as they can have enormous implications for data, processes, and technology. Understanding the financial impact of multiple scenarios is crucial before finalizing. As a word of warning, it is unlikely that LDTI implementation will progress along a clean linear path. Setting aside time to go back and challenge some initial assumptions can make a difference.

Overall, RGA’s most difficult technical challenges have revolved around efficiently managing the data necessary for calculations and reporting.

What recommendations do you offer for insurers going through this process?

In RGA’s experience, we found enormous value in starting “dry runs” as soon as possible and conducting as many as possible, even if the results are approximate and manually produced. This iterative method provides a realistic measurement of progress. More importantly, nudging the executive team to be involved earlier allows the valuation and finance teams to practice explaining the financial results to the leadership teams. As with all projects, securing visible and consistent support from the company’s executive team helps the project team gain the resources and attention necessary for success.

Accounting changes are taking place around the world. Countries without robust regimes are implementing them in response to the new IFRS regulations, resulting in fundamental shifts in some markets. Given this complexity, it is essential to dedicate high-performing staff to work on complying with these projects. Team members should be highly qualified from key disciplines, including valuation, finance, and IT. This approach helps companies identify goals to accomplish and develop the focus necessary to achieve them.