The Financial Accounting Standards Board’s (FASB) Accounting Standards Update (ASU) 2018-12, known as Long-Duration Targeted Improvements (LDTI), marks a notable shift in accounting for long-duration insurance contracts.
The new requirements present unique challenges and opportunities within operations, finance and accounting, as well as emerging trends. These trends are reshaping the future of financial reporting for insurance companies with long-duration contracts.
LDTI dramatically impacts financial reporting and actuarial modeling for insurance companies.
It introduces rigorous requirements to enhance transparency, comparability and accuracy in financial reporting. Understanding LDTI’s impact on insurance clients and the critical role of data management is essential for compliance.
LDTI Overview and Its Impact on Insurance Accounting Standards
Issued in August 2018, LDTI overhauls U.S. GAAP accounting for long-duration insurance contracts, such as term life, universal life, traditional whole life limited-payment contracts and annuities. Its four key objectives are to:
- Improve the timeliness of recognizing changes in liabilities for future policy benefits (LFPB).
- Standardize discount rates and further require assumption updates in modeling.
- Simplify deferred acquisition cost (DAC) amortization.
- Enhance disclosure requirements.
These changes aim to provide stakeholders with more current and comparable financial data. LDTI primarily impacts life insurance, annuities, long-term disability and variable annuities. Unlike short-duration contracts (e.g., property and casualty), these products involve extended liability periods, making them sensitive to changes in mortality, lapse rates, discount rates and economic conditions. Reinsurers and global insurers adopting both LDTI and International Financial Reporting Standard (IFRS) 17 face additional complexity due to overlapping compliance demands.
LDTI Effective Dates
LDTI requirements went into effect for public companies in January 2023 and are now effective for non-public (all non-SEC filers) insurers as of January 2025. For those with long-duration contracts, 2025 audits based on U.S. Generally Accepted Accounting Principles (GAAP) will likely have additional testing and disclosures around key adoption and ongoing accounting changes related to LDTI.
LDTI Impact on Insurance Clients and Contracts
LDTI affects insurers issuing long-duration contracts by requiring more frequent updates to cash flow assumptions and discount rates, leading to increased earnings volatility. For example, life insurers and annuity providers must now update assumptions annually, replacing static models that locked in conservative estimates at contract issuance.
While this dynamic approach helps ensure financial statements reflect current market conditions, it also introduces complexity in actuarial and accounting processes. Products such as long-term care, disability income, and guaranteed minimum death benefits may see reduced liabilities in high-interest-rate environments, potentially cushioning other financial impacts.
Data Management and Integrity in the LDTI Framework
LDTI’s granular reporting requirements demand robust data management systems. Insurers must collect and process historical and current data on policyholder behavior, claims and economic variables to support updated assumptions. This data enables detailed disclosures, such as liability roll-forwards. This necessitates integration across actuarial, finance and information technology (IT) departments, breaking down traditional silos.
Importance of Accurate Data for Compliance
Accurate, traceable data is the backbone of LDTI compliance. Errors in cash flow assumptions or discount rate calculations can lead to misstated liabilities, regulatory penalties or loss of stakeholder trust. For instance, LDTI requires insurers to measure market risk benefits (MRBs) at fair value, necessitating the use of extensive risk-neutral scenarios. Inaccurate data could distort these valuations, impacting financial statements and investor confidence. Automated systems that ensure data consistency and auditability are critical to meeting these demands.
Evaluating Data Management Systems and Processes
Insurers must assess whether existing systems can handle LDTI’s data granularity and volume. Legacy systems often lack the flexibility to process real-time updates or integrate actuarial and accounting data. Processes should include regular data validation, user acceptance testing, and controls to ensure end-to-end accuracy. Insurers should also consider cloud-based platforms for enhanced computing power and compliance with evolving standards.
Internal Audit’s Role in Ensuring Data Integrity
Internal auditors are pivotal in validating LDTI compliance. They assess data quality, test controls over actuarial models and ensure accurate financial reporting. By reviewing data inputs, calculations, and disclosures, auditors mitigate risks of non-compliance and identify gaps in system integration.
For example, internal auditors verify whether discount rates align with market conditions and verifies that roll-forward analyses are substantiated. A robust internal audit framework fosters confidence in financial reporting and prepares insurers for external audits.
LDTI and Financial Reporting: Challenges and Opportunities
Financial Reporting Challenges
The shift to a fair value model for MRBs and annual assumption updates increases earnings volatility, complicating forecasting and strategic planning. The need for historical cash flow data can strain legacy systems while global insurers face dual compliance with LDTI and IFRS 17, requiring harmonized processes. Remote work further complicates collaboration across actuarial, finance and IT teams. These factors can lead to higher implementation costs and operational disruptions.
Impact on Financial Statements
LDTI transforms financial statements by requiring more frequent liability remeasurements. Changes in discount rates are reflected in accumulated other comprehensive income (OCI), not profit and loss, reducing P&L volatility but affecting balance sheets. For example, higher interest rates in 2023 lowered recognized liabilities for some products, which impacted reported equity. Enhanced disclosures, such as disaggregated roll-forwards, provide deeper insights and demand significant data and process overhauls.
Transparent and Accurate Reporting
LDTI’s emphasis on current assumptions and detailed disclosures enhances transparency, enabling stakeholders to better assess insurers’ financial health. Standardized discount rates improve comparability across firms, aiding investors and analysts. Automation and modern subledger solutions streamline reporting, reducing errors and enabling real-time insights.
How Auditors Can Enhance Stakeholder Trust and Confidence
External auditors play a critical role in validating LDTI compliance, enabling accurate financial statements and complete disclosures. By testing actuarial models, discount rate assumptions and data integrity, auditors enhance trust among investors, rating agencies and regulators. Their scrutiny helps insurers avoid material weaknesses, as warned by Fitch Ratings, which could impact credit ratings if LDTI reveals poor asset-liability management.
What the Future Holds for LDTI
Anticipated LDTI Regulatory Changes
While LDTI’s core framework is set, ongoing industry interpretations may lead to clarifications from FASB. For instance, the 2022 ASU amendment allowed insurers (election) to exclude derecognized contracts from LDTI if no significant involvement remains, which eased transition burdens. Future updates may address complexities in MRB fair value calculations or harmonize LDTI with IFRS 17 for global insurers.
Impact of Global Trends on LDTI and Auditing Standards
Global trends, such as environmental, social and governance (ESG) reporting and digital transformation, are influencing LDTI compliance. Insurers are aligning LDTI data systems with ESG requirements to meet emerging regulations. Artificial intelligence (AI) and cloud computing are transforming actuarial modeling, enabling faster, more accurate calculations. Auditing standards are evolving to incorporate data analytics and automation, with firms offering solutions to integrate LDTI with IFRS 17 and 9 and Solvency II reporting.
Preparing for the Future of Auditing in the Insurance Sector
Insurers must invest in scalable, automated systems to stay ahead of regulatory and technological changes. Training multidisciplinary teams in actuarial, finance and IT allows for seamless LDTI implementation. Internal auditors should adopt data-driven tools to enhance audit efficiency, while external auditors will increasingly rely on AI to analyze complex datasets. Collaboration with assurance, tax and consulting firms can provide experience and resources to modernize systems and align with U.S. standards with global accounting standards, if required.
How Cherry Bekaert Can Help
LDTI is a transformative force in insurance accounting, driving transparency while demanding significant operational changes. By prioritizing data integrity, modernizing systems, and leveraging internal and external audits, insurers can navigate LDTI’s challenges and seize opportunities for enhanced reporting.
As global trends like ESG and digital transformation shape the industry, proactive preparation will position insurers for compliance and competitive advantage. Stakeholders, from CFOs to auditors, must collaborate to ensure LDTI not only meets regulatory demands but also builds trust in the insurance sector’s financial future.
It’s crucial to enlist a trusted advisor with extensive insurance industry experience and an understanding of the risks and regulatory challenges insurance companies face. Cherry Bekaert’s Insurance Practice understands the intricacies of statutory and insurance standards, safeguarding your organization’s financial integrity while adding value to your business.
