24 minute read 10 May 2019
Business people pointing at projection

How targeted improvements for long-duration contracts impact insurers

Authors

Chad Runchey

EY Americas Insurance Advisory; Principal Ernst & Young LLP

Career EY’er. Educated in Madison, interned in Hartford, started in Chicago, now working in New York. Leveraging an actuarial background to help clients solve their challenges.

Doug French

EY Americas FSO Finance Performance and Risk Leader, EY Americas FSO Insurance and Actuarial Advisory Services Leader

Actuarial consultant. Speaker. Transformational leader.

24 minute read 10 May 2019

More than an accounting change, ASU 2018-12 will force insurers to make changes across departments such as actuarial, finance, IT and more.

As with many reporting changes, there is much to think about, from the technical (understanding and explaining new accounting policies and earning measures) to the practical (modifying data and valuation systems) to the strategic business implications.

Senior finance, accounting and actuarial leaders are called upon to master the technical and practical while piecing together information from external and internal resources to minimize the risk associated with future business implications and still position their companies to accelerate growth in the age of digital transformation.

A change with the broad impact of Accounting Standards Update 2018-12, Targeted Improvements to the Accounting for Long-Duration Contracts (ASU 2018-12), surfaces questions from stakeholders and at this given moment there’s more unknown than known.

In order to stay informed and ahead of key questions related to ASU 2018-12, it is important to stay ahead of implementing the new standard. This site will provide easily accessible and well-researched information continuously exploring relevant insights for insurers.

Update: New effective dates for LDTI

The FASB tentatively decided to defer the effective date for LDTI for all entities, based on the significant systems and data challenges that insurers were facing and concerns about the current implementation timeline. The following table reflects how calendar-year entities would be affected by the deferrals the FASB tentatively decided to propose:

  Existing effective dates Efective dates the FASB
decided to propose
SEC filers Other PBEs Other
entities
SEC filers
excluding SRCs
All other
entities
Insurance First quarter
2021
First quarter
2021
2022 First quarter 2022 2024

Download full report 

Not just an accounting change

The effects of ASU 2018-12 go far beyond the accounting department. Requirements stemming from the rule changes will affect several areas of the enterprise, including:

  • Program and change management
  • Accounting: Apply the new standard while keeping in mind the real business and financial implications of each aspect of the implementation. Make educated decisions about how various accounting treatments may affect the rest of the enterprise.
  • Actuarial: Incorporate additional data elements about policyholders, including fine-grained transactional data, into actuarial projection models. Update business processes and governance for actuarial activities including assumption setting and results analysis.
  • Finance: Revise the process of generating financial statements, with new supplementary statements for increased disclosure and non-GAAP operating earnings metrics for investor clarity.
  • Data and systems: Capture at the required level of granularity all relevant and required data views for policy administration, billing, cash and claims systems. Place the new data within a data repository accessible to multiple areas of the enterprise. Assess the need for complementary changes to core systems, IT connectivity, rules engines and BI tools. Work with internal IT teams and solution partners to implement the required changes under deadline pressure, even while competing for resources with other transformation initiatives.
  • ALM hedging
  • Risk management
  • Investor relations

Rather than coping with the rule changes separately through each individual department or function, insurance companies should take a strategic approach to ensuring a coordinated response by implementing the complex rule changes, generating new data sources and testing new business processes under tight deadlines and high criticality.

EY’s US GAAP Targeted Improvements Question Series

EY’s US GAAP Targeted Improvements question series will take two minutes to continuously navigate you through the complicated questions you are facing with implementation. These are questions collected from our ongoing work with a wide-range of insurers pressing forward with implementation.

Technical perspectives: the investor story

After insurance companies transition to meet the requirements of ASU 2018-12, their CFOs will need to be ready with clear expectations for boards and shareholders about how and why financial results may appear more volatile and emerge differently than in the past.

Effective communication with CEOs, boards, analysts and shareholders will decrease the risks of erratic stock price movement in unpredictable markets as quarterly financial results are shared with the public. It’s important at this juncture to explore key questions such as:

  1. How will management explain the new complexity in reporting period-to-period changes to CEOs, boards, analysts and shareholders?
  2. How will management explain the contribution of DAC to earnings now that the amortization basis is disconnected from profitability?
  3. What impacts will the decisions made at transition have on future earnings emergence?
  4. What impact will early adoption have on current and future earnings?
  5. Should I use the full retrospective transition approach if the data is available? And what impact will that have on earnings emergence?

We've got a lot to say.

Our ASU 2018-12 webcast series further discusses the cross-functional impact of these extensive accounting changes.

Discover

Summary

CFOs need to be prepared to explain the changes in earnings as financial results emerge differently than expected, and when assumptions are updated. Insurers that understand ASU 2018-12 and analyze its financial impacts, both at transition and for ongoing business, will be well positioned to effectively explain the impacts on future earnings emergence. 

About this article

Authors

Chad Runchey

EY Americas Insurance Advisory; Principal Ernst & Young LLP

Career EY’er. Educated in Madison, interned in Hartford, started in Chicago, now working in New York. Leveraging an actuarial background to help clients solve their challenges.

Doug French

EY Americas FSO Finance Performance and Risk Leader, EY Americas FSO Insurance and Actuarial Advisory Services Leader

Actuarial consultant. Speaker. Transformational leader.