Insight

5 strategies to capitalize on the LDTI extension

Van Beach, Principal, Milliman.

On July 17, 2019, the Financial Accounting Standards Board (FASB) announced it will extend the timeline to implement the Targeted Improvements for Long Duration Contracts (LDTI), moving the go-live date to January 1, 2022. The original timeline was aggressive, forcing companies to address several hard realities to meet the deadline. With an extra year, how should companies respond? Below we list five strategies to capitalize on the extension, ranging from conservative to aggressive.

  1. Reduce risk. With the original timeline, a misstep or an unknown delay could have potentially put compliance at risk. This risk still exists even with the extension. Companies may want to stick with the current implementation plan and be operational and compliant as soon as possible. Then they can work incrementally to improve upon a compliant foundation.
  2. Reduce cost. For many companies, the original timeline required costly approaches to meet the deadline. Project plans were highly parallelized, often with throw-away work required. Further, additional external resources were brought in to staff the multiple work streams. With extra time, companies can hire, redeploy, or pursue other options to reduce the need for external resources. More efficient project plans with less redundancy can also be pursued. Companies can adjust their plans to reduce cost with the same target objectives.
  3. Evaluate wider range of options. Limited time meant that companies could not fully evaluate all options on transition approaches, cohort definitions, and other methodology choices. With extra time, companies can now choose to do more analyses to understand the financial impact of various methodology levers and optimize the approach.
  4. Focus on strategic value. The original LDTI timeline put pressure on companies to take shortcuts and other ”triage” approaches that were necessary for compliance but were not consistent with a long-term, strategic implementation. With the extension, companies can now choose to pursue implementation approaches that will deliver a compliant solution, but with more strategic value.
  5. Paradigm-shift. Taking the prior strategy a step further, some companies may choose to change some or all of their approach to LDTI, create a new trajectory for their implementation, and dramatically reshape the target end-state. With the prior timeline, some implementation options (e.g., migrate to a new valuation, data platform, etc.) could not even be considered. With the extension a company could choose a paradigm-shift in their approach. Clearly this is still a bold move, but that option is back on the table for consideration.

The original timeline was a wake-up call that spurred the industry to action. LDTI is now firmly in focus, with the substantial implementation challenges much better understood. This is a unique opportunity. Companies need to decide how they will attempt to capitalize on the FASB extension:

A conservative approach where the LDTI implementation is pursued ahead of schedule may not seem sexy, but if there are unknowns that cause delays, that prudence may be rewarded. Reducing cost is also always is good idea, and in many situations is the most certain way to add value.

On the other hand, a practical approach where the core implementation plan remains intact, but additional analysis is conducted to better understand the methodology choices, explain impacts, and educate leaders and senior management will pay dividends for many companies who were feeling panic at the thought of standing in front of the investor community to explain results. If value from operational efficiencies is not obvious, putting effort towards additional analysis may drive the greatest returns through better methodology choices and deeper understanding of LDTI financial drivers.

Finally, an aggressive approach to implement LDTI not only to comply with the new requirements but create systems and processes that generate value through efficiency and insights across all actuarial and reporting functions has the potential to drive value for years. Armed with greater information and understanding, and offered another chance to choose their path, some may attempt to try to leapfrog their peers with new technology, new systems, new approaches to data or other aggressive initiatives.

The right answer will depend on each company’s situation, and mix-and-match strategies that combine two or more of the options are also possible approaches. While the strategies each entail some risk, one thing is certain – complacency is not an option.

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