10/6/21

LDTI Update: Compliance Presents Opportunity

The Financial Accounting Standards Board passing of ASU 2018-12 (“LDTI” – Long Duration Targeted Improvements) is the most effective change to regulatory reporting for insurers in decades. It has wide-scale implications across the organization with potential significant impacts on reported financial results under Generally Accepted Accounting Principles (GAAP). Initially published in 2018, and after several delays of its effective date, SEC reporting entities (excluding Small Reporting Companies) must comply for fiscal years starting after Dec. 15, 2022, and non-SEC filers, as well as Small Reporting Companies must comply for fiscal years starting after Dec. 15, 2024.

The implementation of LDTI should be used as a catalyst for change. The new regulation presents opportunities in three key areas for insurance organizations to assess their IT architecture and upgrade it to meet the changing needs of the market.

Opportunity Area 1 – Early Impact Analysis & Communication: LDTI requires retrospective adjustments to previously reported financial results, which complicates managing data fields and formats across varied sources. Starting impact analysis early and communicating the effect from adoption of LDTI to internal and external stakeholders is critical in managing potential fall-out from material adjustments and volatility from historical trends.

Reporting organizations should have preliminary financial impacts at least two reporting quarters in advance of their adoption date. Starting impact analysis early allows for more time to plan for changes to internal and external reporting. Internally, adoption of LDTI will affect KPI dashboards, financial projects and potentially compensation programs. Externally, companies will need to be prepared for changes to press releases, analyst’s reports, key financial data, annual reports, marketing material, and SEC reports.

Opportunity Area 2 – Tech Modernization: Implementing LDTI requires ability to access and manage data, creation and use of modeling tools, process changes and reporting. If your technology platform is outdated, it may lead to increased manual work across various spreadsheets and departments that increases vulnerability to human error and leads to data integrity issues.

Companies should pursue modernization of their end-to-end technology platforms that reduce the need for integration and data reconciliation points. This will improve data integrity and timeliness of data availability. End-to-end technology platforms can also improve audit trails reducing the cost and time to perform annual/quarterly audit procedures.

Opportunity Area 3 – Improved Reporting & Process Documentation: The journey from assessment to implementation requires multiple stages including: team construction, policy setting and methodology, data gathering and modeling, technology and processes changes, communication, and reporting.

Any changes in policy, interpretation of the standard or defects identified through implementation of LDTI need to be tightly managed, as changes to foundational requirements have the potential to significantly affect the underlying data infrastructure, processes, and reporting, resulting in costly timeline delays and communication hurdles. This is a great opportunity to revamp existing process documentation and reporting to get at the true business need.

The delayed implementation of LDTI provided some much-needed relief to the industry, but it should not be squandered as the deadline is fast approaching and the work to be done for compliance can be extensive. Capco has an extensive track record of successfully helping companies manage change by building internal capabilities around risk management, controls, and compliance to adapt faster and create sustainable competitive advantage. We can help you get the right people, with the right skills, into the right roles to drive change, reduce risk, and, ultimately, achieve compliance goals.

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