As previously published in the SOA Modeling Platform April 2021 edition.
The Accounting Standards Update (ASU) No. 2018-12, also referred to as “Targeted Improvements to the Accounting for Long-Duration Contracts” (LDTI) amends existing accounting requirements under generally accepted accounting principles (GAAP) for long-duration contracts. For U.S. reporting companies, LDTI is one of the most significant accounting framework changes in decades, impacting virtually every functional area within the company.
The actuarial modeling process is no exception; implementing changes of this magnitude requires careful assessment of the pending requirements, measured coordination with associated in-flight efforts, and collaboration across accounting, finance, actuarial, and information technology (IT) departments.
In particular, modeling actuaries must navigate a confluence of changes to the models, including increasingly complex calculations, new data sources, new reporting requirements, and integration of functionality being rolled out by actuarial software providers. Further, a company’s particular set of circumstances, such as being a public or private entity, or the degree of internal resource capacity, can influence the degree by which LDTI will be more of a compliance exercise versus an opportunity to modernize.
This article explores some key challenges facing the modeling actuary related to LDTI implementation and shares associated compliance and modernization considerations.
Migrating toward a defined, yet adaptive, future state vision
Establishing a clear future state vision of a company’s end-to-end process for financial reporting and translating this vision into a strategy and tactical execution blueprint is critical for successful LDTI implementation. This is true regardless of whether companies approach LDTI as a compliance exercise, aiming for “minimum viable product,” or as an opportunity to modernize. A key question to answer at the forefront of an LDTI implementation is what scope should be, from a modernization perspective.
Over the past two years, a number of companies have formulated road maps for their LDTI journey, with their modernization scope defined, and are currently in the midst of execution. During this time, the industry had to navigate around a number of moving targets, such as an evolving interpretation of LDTI guidance, changing timelines for go-live date, and evolving industry approaches toward implementation. Companies must then plan and implement adaptively, in an agile fashion, prioritizing or backlogging aspects of development based on new information revealed along the way.
Companies should consider taking stock of current future state vision and blueprints and determine if refinements are required. For example, a number of companies with in-flight model conversions had to make conscious decisions to keep portions of their business on legacy actuarial software given tight implementation timelines. With an expanded implementation horizon, possibilities open up to convert more models to the future state platform and increase the ceiling on transformative benefits to the reporting process.
Taking an adaptive approach, such as agile, or even just periodically reviewing your strategy and tactical blueprint, can help your company realign priorities across the functional areas, and reduce the operational risk of some areas falling behind others. This effort also opens up an opportunity to assess the latest tools and technologies that can be valuable on a look-forward basis.
Lastly, modeling actuaries must take an active stance in contributing to the vision and design of a company’s post-LDTI world. Actuarial models are a key part of the end-to-end LDTI reporting process, and the quality of the model and associated infrastructure will have a direct impact on the efficiency and effectiveness of the end-to-end process.
