Simplify Implementation of Both IFRS 17 and LDTI

Of the many modernization efforts that insurance companies have ahead of them in the next few years, the transitions to IFRS 17 and LDTI are among the most important. These two standards have to do with improving the quality, rigor, and transparency of financial information that pertain to insurance contracts.

In meeting both IFRS 17 and LDTI, insurers commit to a level of thoroughness in preparing their insurance contracts that helps their stakeholders understand their financial positions better. But admittedly, starting on a compliance journey for one of these—let alone both at the same time—may initially seem like a daunting prospect.

Insurers will have a little less to fear if they understand the key differences, as well as the key intersections, between IFRS 17 and LDTI. It’s a matter of brushing up on what these standards entail, while also exploring better technological infrastructure for fulfilling IFRS 17 and LDTI principles.

If you’re in a position of leadership in an insurance company, consider investing in dedicated LDTI and IFRS 17 solutions that will streamline implementation in time for the two standards’ deadlines.

Below is a briefer on IFRS 17, LDTI, the current readiness of the insurance industry to comply with these standards, and how to kickstart your own compliance journey for the next two years.

IFRS 17 and LDTI: A Briefer on Two Accounting and Financial Reporting Standards for Insurance Contracts

IFRS 17, which was issued in May of 2017, is an International Financial Reporting Standard that governs how insurance contracts are measured, presented, and disclosed to stakeholders. Its implementation is overseen by the International Accounting Standards Board, or IASB.

As a replacement for its predecessor, IFRS 4, it aims to afford stakeholders an even clearer view of the organization’s current profitability situation, financial status, and exposure to risk. With the knowledge that cash flows generated by insurance contracts vary substantially over time, IFRS 17 demands greater standardization of insurance accounting practices to better reflect the insurance organization’s financial position. 

The Long Duration Targeted Improvements (LDTI) standard, on the other hand, is a standard that applies to all insurance organizations that follow the United States Generally Accepted Accounting Principles (GAAP). It is overseen by the Financial Accounting Standards Board (FASB), which is recognized by the United States Securities and Exchange Commission (SEC) as the authority for all companies that adhere to the US GAAP.

As its name implies, LDTI concerns itself with long-term insurance contracts, such as those that pertain to life insurance. Major changes introduced by this standard include a more updated means of measuring insurance liability, deferring and amortizing acquisition costs on a straight-line basis, and greater detail on disclosure requirements. 

Due to factors like fragmented compliance abilities across regions, as well as the impact of the COVID-19 pandemic on insurance organizations, both IASB and FASB have extended their deadlines for meeting their respective standards to 2023. That gives insurers the option of becoming either early adopters or on-time implementers of IFRS 17 and LDTI. Regardless, insurance organizations that have their eye on both standards must clear the following goals for implementation:

  • Finalizing the first pass of policy decisions with regard to IFRS 17 and LDTI;
  • Conducting gap analyses in terms of accounting processes and technological infrastructure that are needed to meet both standards;
  • Running functional development and testing of compliance efforts, and;
  • Overseeing parallel runs of new IFRS 17 and LDTI solutions alongside insurers’ old systems.

The Road to Simultaneous Compliance of IFRS 17 and LDTI: 5 Pointers for Insurers

As 2023 draws nearer, insurers can relieve their actuarial teams and finance teams of pressure and simplify their compliance journeys for both IFRS 17 and LDTI in the following ways:

Understand the Key Areas of Difference Between the Two Standards

The first step is to bridge each team member’s knowledge gaps on either standard and what makes each different from the other. For one, IFRS 17 is a global standard that insurance companies worldwide will strive to meet, while LDTI is a standard that is unique to insurance companies within the United States. Moreover, the two standards differ in terms of their scope, their methodology for calculating risk adjustment, their approach to aggregating contracts, and their requirements for presentation and disclosure. 

Before any compliance efforts begin in earnest, staff in charge of overseeing IFRS 17 and LDTI must read up and analyze the differences. This will contribute to a clear-headed assessment on whether the company has met its desired milestones for IFRS 17, LDTI, or both.

Assess Your Readiness for IFRS 17 and LDTI Transition by Conducting a Gap Analysis

The next step is to audit your insurance organization’s current technology stack to see how capable it is of meeting IFRS 17 and LDTI directives on a granular level. If you are onboarding a new solution, ask your vendor to help you run a comparison between the calculation, data synchronization, and reporting capabilities of your old system versus your new one.

Pinpoint Your Organization’s Regulatory Overlaps for IFRS 17 and LDTI

Next, to save time and to increase efficiency in your compliance efforts, identify the regulatory overlaps that may exist between IFRS 17 and LDTI. One obvious example lies in the target date of implementation, as both IASB and FASB hope for large-scale compliance from their constituents by 2023. From here, you can envision 2022 and 2023 as crucial years for meeting both standards. Therefore, you can set some per-month or per-year implementation milestones that can fulfill both sets of requirements at the same time.

Identify Data Overlaps for IFRS 17 and LDTI Compliance

One initiative that will bring you closer to meeting IFRS 17 and LDTI at the same time is the harmonization of your data. If one streamlined and accurate source of data can serve as the basis for your insurance contracts, half of the battle to fulfill IFRS 17 and LDTI requirements will already be won.

Coordinate with All Departments Involved in IFRS 17 and LDTI Compliance Efforts

Lastly, you will need to oversee the unification of multiple workflows, as well as manage interdependencies between departments, in order to sync up your whole-of-organization efforts to meet IFRS 17 and LDTI. This is something you should aim to do throughout your compliance journey, from its very beginning to its eventual completion in 2023.

Conclusion: Accelerating Your IFRS 17 and LDTI Compliance Journeys

It’s no secret that the side-by-side implementation of IFRS 17 and LDTI won’t be very easy. But the sooner an insurer accelerates their compliance journeys for both of these standards, the closer they will be to both local and global accounting excellence for a vital aspect of the insurance process. Choose to be an early or a timely adopter of IFRS 17 and LDTI, and upgrade your organization’s capabilities for meeting the two as soon as possible.

Leave a Comment