LDTI

Accounting policy decisions: Before implementing the standard, insurers must understand it and make important decisions about how the standard applies to their businesses. For example, how should deferred acquisition costs be amortized? What level of aggregation will be used in developing cohort groupings? Decisions such as these will drive the implementation approach that follows.

Assumption management: Under LDTI, actuarial assumptions must be monitored closely and updated at least annually. A process must be in place to make sure that assumption updates are made accurately, on time, and as part of a strong governance framework.

Experience studies: Firms must consider whether to undertake efforts to formalize experience studies and how that workstream should be integrated into their valuation processes.

Model input: Calculations for the liability for future policy benefits and several other actuarial balances require historical unlocking of actuarial assumptions by incorporating actual past cash flows. While this concept is familiar to many insurers who currently perform retrospective estimated gross profit unlocking, many firms are taking the opportunity to re-engineer existing processes related to data collection and management.

Model output: Insurers must have suitable storage and analysis tools that enable actuaries and accountants to work side by side to better understand actuarial model output from both an accounting and analytical perspective.

Roll forwards: To produce the roll forwards, insurers must produce many cash flow projections (perhaps five or six in terms of liability for future policy benefits and 10 or more sets of stochastic projections for a market risk benefit). An automated process must be in place to produce those runs. The results of the runs are then used to produce the accounting entries and formal roll-forward disclosures.

While some insurers might already be producing some form of roll-forward disclosures under existing GAAP, the complexity of the process has the potential to be much greater under LDTI. Insurers must streamline and automate the process and consider whether a dedicated subledger provides the most logical framework for producing the required disclosures.

Consideration of the level of detail to incorporate in the general ledger (GL): At one extreme, firms might prefer to encapsulate LDTI measurement complexities in a subledger solution and only feed aggregated results into the thin GL approach. This keeps the burden of LDTI on the GL low but implies that the production of LDTI disclosures must come from the subledger solution, and analysis on the GL level remains limited. At the other extreme, firms might want to enrich their GL with the granularity required for LDTI by using the thick GL approach.

Firms may need to reconsider how they post the difference between statutory reserves and GAAP reserves in their GL given that GAAP reserves are now subject to a different roll-forward analysis.

Right tools for reporting: Targeted improvements aim to bring transparency to the financial reporting process, and insurers must have the proper tools to take advantage. For example, an insurer should perform its roll forwards at the appropriate level of disaggregation necessary to understand the movement of its actuarial balances period to period. In addition, an insurer should have a facility where both actuaries and accountants can analyze results and use those to drive management decisions.