LDTI Should Spell Opportunity
By Naxine Chang, Robert Morison, Mar 24, 2021
Complying with the Long-Duration Targeted Improvements standard presents major challenges to the business processes and information systems of insurance companies. At the same time, it offers them the opportunity to make rapid progress in modernizing those processes and systems to deliver management insight of unprecedented value. To explore the two sides of the LDTI coin, IIA interviewed Naxine Chang, FSA, MAAA, North America Insurance Strategy Head at SAS Institute.
Let’s start with the basics of LDTI.
This is familiar ground in the industry, but here’s a quick overview. Long-Duration Targeted Improvements, or LDTI, is an accounting standard issued by the U.S. Financial Accounting Standards Board (FASB) in 2018. The objective is to improve, simplify, and bring more relevant financial measures and transparency in financial reporting for insurance companies that issue long-duration contracts. These include, but are not limited to, term life, whole life, limited payment, universal life type, annuities, disability income, and long-term care.
LDTI does not overhaul the U.S. GAAP accounting model, but rather specifies improvements in four “targeted” areas, including more current measures of insurance liability, unified measure of market-based options and guarantees, simplified amortization of deferred acquisition costs, and enhanced qualitative and quantitative disclosures. It nonetheless represents significant change for insurers. After a pair of postponements, the new accounting and disclosure changes go into effect for defined larger U.S. Securities and Exchange Commission (SEC) filers on January 1, 2023, and January 1, 2025, for others.
For insurers, LDTI demands growing volumes of new data, including more granular data at the enterprise level, more historical data, and more interdisciplinary data from policy, actuarial, and accounting systems. It broadens the scope of compliance implementation with new measures, calculations, analytics, and disclosures. Insurers must review and as needed, update the assumptions behind their calculations. Insurers must introduce new processes, integrate actuarial and accounting systems and workflows, and demonstrate governance for oversight and transparency. And, of course, the new approach must be auditable end-to-end, and satisfy auditors’ requirements with sufficient controls and documentation.
Are insurers prepared to meet the new standard?
For the most part, no – or at least not yet. They need to get new data, technology, processes, and skills in place. Research by Deloitte has found that most insurers are behind in meeting their LDTI roadmap milestones, with much work still to do in data access, integration, and reporting. They say that insurers need to rapidly evolve from a “transaction state” to an “information state” to satisfy LDTI reporting requirements, and that has significant impact on processes, metrics, and infrastructure.
Insurance is an information-intensive industry, and companies have a lot of older and siloed legacy systems, especially if they have grown through merger and acquisition. Fragmented data sources, applications, and processes are resistant to change, and each round of new regulation adds to the patchwork, making a major change like LDTI very complicated and potentially expensive to address.
Some insurers are already in the middle of multi-year business information systems and actuarial software modernization efforts to create a more uniform and flexible foundation. These are massive undertakings, especially as they take advantage of the technologies of digitalization, cloud computing, AI (artificial intelligence) enabled automation, and Big-Data enabled predictive analytics. These companies face a different kind of challenge with LDTI – how to incorporate new requirements on the fly.
Under both scenarios, compliance changes are complicated now by the COVID-19 pandemic, with key staff working remotely and incurring more communication overhead to stay coordinated. This is extra challenging because LDTI demands so much interdisciplinary effort.
Why are insurers having to play catch up? The root cause is that compliance has been viewed as a necessary evil and an expense to be minimized, rather than as a process that can add value and improve management.
What is the recommended strategy for implementation of LDTI compliance?
A foundation for strategy is gap analysis – what’s missing or needs to change to meet the new standard? If that’s as far as the organization looks, then it continues to expand and complicate the patchwork of compliance systems. The strategy is to kick the can down the road again.
A longer-term and more strategic view asks: What kind of business information platform do we need not just to comply now, but to get really good at compliance and adaptable to change? What kind of platform can create ongoing operational and management value – and maybe lower the cost structure of compliance? The company reassesses its collection of systems and considers how to optimize compliance processes. It then works backwards from the new objectives to construct an implementation and change management plan.
A change as impactful as LDTI can be the catalyst for initiating or expanding modernization efforts, for making a strategic investment in compliance. The strategy is to transform a compliance exercise and perhaps finance and actuarial at large, to create a platform that positions the enterprise for future growth and change. It’s to turn necessity into opportunity. As Laura Gray, U.S. Actuarial Network Leader at KPMG, puts it, “LDTI has become a catalyst for our clients to modernize the integration between actuarial and financial reporting processes, and a springboard for creating technology infrastructure that helps insurers transform their business.”
The rationale must be rooted in business strategy, and today’s pressing question for insurers is where to find growth and profitability. Interest rates are low, and merger and acquisition opportunities have dwindled. So organic growth looks to customer acquisition and expanding market share. And profits can be enhanced by streamlining operations and reducing costs. A comprehensive and robust technology infrastructure for compliance can deliver better product and management information in service of both revenue and productivity strategies. This is the right time for modernization and innovation.
Whatever the approach, an LDTI response strategy has got to account for putting the components in place – data, software and hardware technology, methods and processes, and people and skills. It also needs to account for putting the success factors in place, starting with executive understanding and vision and alignment around the objectives. And it must pay special attention to the key implementation question of how much of the solution to buy and how much to try to build in-house.
Please say more about buy-vs-build and how that decision plays out in this situation.
Most insurers have been handling regulatory changes in-house for a long time, and the IT organization and actuarial modeling teams in this case may consider it their franchise. A company that chooses to minimize short-term cost and do the minimum needed for LDTI compliance will continue down that path, even though, as I mentioned, it adds to the patchwork of systems and increases complexity and cost in the future.
More companies today are taking a buy-before-build approach: buy what you can and only build what else is needed. Especially if they are looking to modernize their business information platforms for the long term, they’ll start with a packaged solution and work with the vendor partner on making local adjustments. That can be the best of both worlds. The vendor brings thorough knowledge of the LDTI compliance solution, and the company provides knowledge of local practices and systems. When regulatory compliance entails complex analytics and process changes unfamiliar to the company’s staff, this partnering proves especially valuable. Let the experts do most of the heavy lifting.
In most insurers, actuary, finance, and technology staff are stretched, and the buy-and-partner option can simplify, accelerate, and derisk LDTI compliance. Then down the road, the vendor maintains and updates the compliance readiness of the core application, saving more staff time and effort.
Experience tells us that, with changes as extensive as LDTI and deadlines looming, there’s greater risk of project failure in-house than with a proven packaged solution. The COVID-19 pandemic raises that risk, with technology staff focused on maintaining business continuity more than applications development. Insurers must take a hard look at their readiness right now to do complex application and analytics development correctly and on time.
What are the characteristics and benefits of a strong information and technology platform?
We should keep in mind that buy-versus-build is not a pure choice, and most solutions are hybrids. Instead of asking, “Should we buy or build?” companies should ask two basic questions: “What are the characteristics of the platform we need?” and “How much help could we use building it?” Matt Clark, National Actuarial Leader at Deloitte Consulting, says, “Insurers are beginning to recognize needs across the entire end-to-end platform, while also wanting system consolidation by leveraging common tools for multiple applications.”
The platform starts with comprehensive LDTI functionality and ease of interface with all data sources. It should be integrated to support the end-to-end LDTI business process and provide a “results repository” with a single source of key information. High-volume, repetitive, and error-prone tasks – especially in data cleansing and integration – should be standardized, streamlined, and automated so actuary and finance staff can spend less time collecting data and more time using it.
At the same time, the platform architecture should provide modularity and flexibility, both to complement existing infrastructure, such as with a data lake, actuarial software, and ledger systems, and to enable future change. It should be open to incorporating additional packaged software and open-source components, including tools and algorithms. It should be “technology agnostic” in its ability to meet future business requirements and regulatory changes.
Finally, it should be possible to extend the platform’s capabilities in additional ways, creating management insight into business operations. For example, insurers want to understand income volatility of a business line or reporting unit under different scenarios, such as assumption changes and benefit variances. This not only informs financials at each reporting period, but also provides the analysis to manage the in-force blocks and to influence new product development. In short, the platform can help produce the financial insight that the C-suite needs to run the business.
Meanwhile, the best vendor partner brings a lot to the table – a solution represented not just in software, but in industry, data management, and process expertise. The vendor should be able to leverage extensive experience in implementing IFRS 17 (International Financial Reporting Standard 17) and other recent regulatory changes. And it should provide a proven business playbook for implementation and change across data, technology, process, and people – not just software installation. You also want a partner who understands the pain points and has learned the important lessons already. Another version of the vendor question is: “Do we need a strategic partner, an operational partner, a technology partner – or all three?”
What are some of those lessons learned and success factors for implementation?
Success starts with clarity around objectives. What is the scope of financial information needed to meet disclosure requirements and support management reporting? Must the insurer file on dual accounting standards, such as IFRS 17 and LDTI, or satisfy a wider variety of regulations around the world? Is the organization committed to building or expanding a robust technology ecosystem for technology stewards, actuaries, and accountants? How can the compliance initiative improve the work of actuarial and finance with more insights into business operations, profit drivers, income volatility, and risk postures?
Also essential at the start is clear-eyed realism about the organization’s readiness to meet the objectives and how much assistance it needs. Can it develop the data, calculations, and processes to implement LDTI? All of the specific elements of compliance can present challenges, for example: more granular and more historical data; better integration, storage, and accessibility of growing volumes of data; sub-ledger postings to bridge actuarial and accounting systems; new compute-intensive algorithms and models; and a repeatable and auditable end-to-end process for LDTI with workflows that implement governance controls. All these elements must work together to avoid costly remediation plans, and they must be reinforced with testing, training, and documentation. Organizations should ask, “What are likely to be the weak links in implementation, and how can those weaknesses be shored up?”
For all the technical demands and complications of LDTI compliance, the biggest challenges are likely to be organizational. You need people with the specific skills and experience to deliver the components I just listed. They also need to work in interdisciplinary teams, with close collaboration among actuary, finance, and technology staff. And it’s a mistake to ask key people to do this work part-time or as extra assignments because, with so many moving parts, LDTI needs constant focus and coordination. At the executive level, I mentioned the imperative for alignment and commitment around the effort. That’s not just up front – leadership has got to be along for the ride, tracking progress and offering support and intervention if needed.
LDTI implementation must also mesh with other business process and information systems modernization efforts under way. The respective playbooks need to be coordinated to protect other investments in actuarial and accounting systems and processes, to avoid working at cross-purposes or reinventing the wheel, and to leverage the things the organization already does well.
Finally, I counsel everyone to beware the common pitfall of underestimation. Even with clear objectives, an accurate readiness assessment, and a detailed but flexible playbook, people tend to be optimistic and underestimate the time, effort, skills, and budget needed – especially when faced with fixed deadlines. Sandbagging is also to be avoided, so strive for realism. And if you have underestimated, be open about the need to “true up” the plan, the better to manage executive engagement and expectations.
Please give us the flavor of some implementations under way.
Here are two at different stages of evolution.
A major U.S. life and health insurance company found that its data volume was outgrowing its current architecture and data was having to be retrieved from too many places. They needed a more robust data and analytics platform both to meet LDTI requirements and to inform and modernize actuarial work. Their approach was buy as much of the solution as feasible because modifying existing software and processes in-house was determined to be higher cost and higher risk. Plus they wanted to be sure that the solution was integrated across lines of business and flexible enough to evolve as needs changed.
SAS is partnering with the company to deploy a new platform focused on shared data access, a library of analytics and reporting solutions, and a subledger structure to integrate data across actuarial and accounting. Key implementation actions on the organizational side have included establishing a governance council and a portal for user discussion and support. The insurer is determined to leverage its new platform not just for minimal LDTI compliance, but to make compliance “smarter” by transforming data consistency, processes, and reporting to enable future change, both business and regulatory. They subsequently decided to leverage the same technology for statutory and tax reporting.
The second example is General Reinsurance Corporation, or Gen Re, an American multinational insurer providing property & casualty and life & health reinsurance products, tools and resources. In light of the global IFRS 17 standard being issued in 2017, Gen Re chose to modernize its technology infrastructure by beginning an implementation of a Risk and Finance solution and platform from SAS. Moving into 2020, Gen Re has decided to leverage the same technical platform to assist in adopting LDTI.
On the data side, Gen Re will be leveraging a common data model for both IFRS 17 and LDTI allowing Gen Re to establish a single source of truth for the two accounting basis. From a financial close perspective, the same process governance framework is being leveraged to ensure an end-to-end process that supports fast close all while providing auditability and traceability. Because of the IFRS 17 work already underway, Gen Re expects to be able to leverage knowledge already gained (in particular architecture, data model, and user interface) to accelerate the path towards LDTI compliance.
From IFRS 17 to LDTI, Gen Re anticipates realizing synergies in areas such as data models, application modules, and shared infrastructure. Moreover, consistent workflow and governance discipline for both IFRS 17 and LDTI enhances enterprise risk management and is expected to satisfy the auditors and regulators alike. Ed Nosenzo, Project Sponsor and North America CFO, commented, “Gen Re’s experience thus far has been that a strong integrated technology platform enables us to make productive changes across both IFRS 17 and LDTI.”
These are very challenging times for insurance companies, other businesses, and the economy overall. With the pandemic and so much else going on, why act now on LDTI?
For starters, there’s the deadline. Many insurers continue to procrastinate, perhaps hoping for another postponement, but that’s a risky bet. Depending upon the complexity of legacy systems on one hand, and needed changes on the other, companies may already be behind time. If your organization has a robust and flexible platform, you’re likely still in good shape, but few do. Experience with IFRS 17 tells us that, even with the help of a packaged solution, full implementation can take 12-18 months including SIT (system integration testing) and UAT (user acceptance testing). And insurers might want to do additional parallel runs with current systems for two quarters before migrating to production. Add up implementation time and test time, and a deadline less than two years away outlooks close.
More importantly, insurers can turn the necessity of LDTI into business opportunity, and SAS recommends and supports this more ambitious strategy. A better integrated platform for business information and compliance improves consistency across common data, comparability of data, and reconciliation of results. It moves the organization closer to a single shared version of the truth, and it enables management to better understand the business and articulate its financial story. In the process, the platform encourages collaboration and innovation across actuarial, finance, and technology.
This in turn creates the opportunity for actuarial and financial transformation by complementing and modernizing actuarial and ledger systems, and by streamlining and reengineering processes for financial close, experience study, financial planning and analysis, model management and governance.
Compliance information is more strategic than most realize, holding extensive but untapped potential for business improvement. Benefits accrue along the way of LDTI implementation and beyond the scope of compliance. A more integrated data platform can help simplify and accelerate application, underwriting, claims, and fraud detection processes. More predictive analytics can personalize and otherwise improve customer outreach, service, and retention. More disciplined and governance-directed workflows can improve the consistency and controls of business operations.
LDTI is not an isolated requirement. This will happen again, no doubt building on what LDTI compliance has put in place. We continue to see the exponential growth of data generated, and regulators keep asking for more, more detailed, and more interconnected data. The importance and value of analytical capability to deliver business insights also continue to grow. The sooner a company has an integrated, flexible, and scalable platform for information, the better. We all need the ability to implement business changes, even large and complex ones, with maximum speed and accuracy, and minimum cost and risk. Most of the industry is playing catch-up technologically. Now is the time to deploy the platforms not just to catch up, but to enable tomorrow’s business transformations.
Finally, insurers, like other enterprises, are looking to uncover the opportunities of the post-pandemic future. A more comprehensive platform of actuarial, risk management, business and finance information and processes supports operational improvement as well as compliance. In fact, it can help uncover where tomorrow’s opportunities really await. It’s always a good time to create new business insight and value.
About the authors
Naxine Chang, FSA, MAAA, North America Insurance Strategy Head, SAS Institute
Naxine Chang is North America Insurance Strategy Head at SAS Institute. In her role Naxine works with financial institutions to advise on Actuarial and Finance transformation and regulatory compliance solutions. Naxine has more than 25 years of insurance industry experience and held actuarial leadership roles in major insurance companies in the US and Canada, and one of the ‘Big Four’ accounting firms. In recent years, she focused on the advisory of valuation and financial reporting transformation and business integration initiatives including Long-Duration Targeted Improvements (LDTI) strategy. Naxine has extensive knowledge designing and implementing actuarial and finance management capabilities in the financial services sector. Naxine is a Fellow of the Society of Actuaries (FSA) and a Member of the American Academy of Actuaries (MAAA).
Robert Morison, Lead Faculty Member, IIA
Robert Morison serves as Lead Faculty with IIA. He is an accomplished researcher, writer, speaker, and management consultant, and an authority on what happens at the intersections of business, technology, and people management. He has been leading breakthrough research for more than 30 years, collaborating with eminent academics, thought leaders, and management innovators. He has written on topics ranging from business innovation, reengineering, and analytics to workforce management, demographics, and retirement.
Bob is coauthor of three books: What Retirees Want: A Holistic View of Life’s Third Age (Wiley, 2020), Analytics at Work: Smarter Decisions, Better Results (Harvard Business Press, 2010), and Workforce Crisis: How to Beat the Coming Shortage of Skills and Talent (Harvard Business Press, 2006). His 2004 Harvard Business Review article, “It’s Time to Retire Retirement,” coauthored with Ken Dychtwald and Tamara Erickson, received a McKinsey Award. He holds an AB from Dartmouth College and an MA from Boston University.