With concerns over costs and a perceived lack of benefits among some insurers, there’s a prevailing mood of doom and gloom about long- duration targeted improvements to U.S. GAAP (LDTI). But rather than striking a deathly blow to the balance sheet, I believe that the new accounting standard for U.S. insurance contracts spells good news for insurers and stakeholders.
From this radical “glass half full” viewpoint, I’ve identified seven big benefits that LDTI will introduce to the insurance industry:
1. Liabilities valued at market value
By bringing the valuation of insurance contracts in line with both the assets that back them and valuations made in other industries, LDTI will instigate better product design, greater transparency, and potentially better risk management.
2. Simplification of DAC
Shadow deferred acquisition costs (DAC) – amortizing DAC based on a projection of profits – is a thing of the past. Simplifying DAC will take the spotlight off a relatively unintuitive actuarial balance and bring it where it belongs, to the valuation of liabilities. For the new transparency that LDTI will provide, look no further than the changes to DAC.
3. Introduction of market risk benefits
Some fear the impact of market risk benefit (MRB) calculations on the balance sheet under LDTI . But the MRB rule has actually consumed many legacy GAAP standards, including SOP 03-1 and FAS 133 calculations split by guaranteed type. Simplification of the valuation of complex liabilities: what’s not to like?
4. Collaboration between actuaries and accountants
Both actuaries and accountants look after the interests of stakeholders and help manage insurers’ finances and risks. But in many organizations, these are still siloed functions with little interaction or understanding of each other’s activities.
LDTI will drive actuarial and accounting teams to work together and establish mutual respect and cooperation, which again can only be good news for stakeholders and improve the way the company is managed in the future.
5. Better governance of actuarial systems
For more than a decade, many insurers have been raising their governance game and reaping tremendous benefits such as lowering operational risks and reducing ongoing costs. Others, however, continue to use actuarial systems without the control and automation that LDTI demands.
Improving governance standards will not only help achieve compliance, but also reduce costs, minimize manual errors and make it easier to access risk insight, all leading to better management of the business.
6. Greater protection for policyholders
LDTI will help strengthen insurance company balance sheets (see benefit 1) and offer more protection to policyholders as a result.
7. Investor confidence
All the above improvements to the accounting standard give investors proper insight into insurance companies, allowing them to compare one firm with another on a more consistent basis. This can only improve investors’ confidence in and understanding of insurers – surely another reason to be cheerful.
However you look at LDTI, nothing will stop it coming into force for the largest U.S. insurers in 2023. So, why not ditch the doom and gloom, seize the opportunity for change, embrace the benefits – and see the many positive sides of compliance?