The New Face of LDTI (Long Duration Targeted Improvements) Under US GAAP

By: Pulkit Pruthi

Background

The new face of LDTI (Long Duration Targeted Improvements) under US GAAP has transformed how life insurers account for and report long-duration contracts. The Financial Accounting Standards Board (FASB) issued ASU 2018-12, which has been effective from 1 Jan 2023 and slightly later for others.

Breakdown of the key changes (“new face”) of LDTI in life insurance:

1. Assumptions – Best Estimate with Regular Updates

Before LDTI:

Locked-in assumptions at inception (e.g., mortality, lapse, expenses) unless loss recognition is triggered.

After LDTI:

1. Annual updates are required (at least once per year) for cash flow assumptions.
2. Current best estimate assumptions are used.
3. Discount rates are updated quarterly, based on upper-medium grade (A-grade) fixed income yield.
4. Changes flow through net income (for assumption updates) or Other Comprehensive Income (OCI) (for discount rate changes).
5. This replaces the old “set it and forget it” approach.

2. Liability for Future Policy Benefits (LFPB)

1. Recalculation of each reporting period with updated assumptions.
2. Unlocking is prospective → no retrospective restatement.
3. Provides a more transparent and timely reflection of experience.

3. Discount Rate – Market-Linked

1. Instead of using the company’s earned rate, insurers must now use a standardized A-grade yield curve.
2. Changes in discount rates go to OCI (Other Comprehensive Income), not P&L.

4. Market Risk Benefits (MRBs)

1. New category introduced under LDTI.
2. Applies to features like Guaranteed Minimum Death Benefit (GMDB), Guaranteed Minimum Income Benefit (GMIB), variable annuity guarantees.
3. MRBs must be:
   1. Separated from host contract.
   2. Fair valued each period with changes in fair value through net income, except for changes in the entity’s own credit risk → OCI.
4. This is a major shift since previously, many guarantees were embedded in reserves with limited fair value measurement.

5. DAC (Deferred Acquisition Costs)

Before LDTI:

Complex amortization tied to gross profits or margins.

After LDTI:

1. Amortized on a constant level basis over expected policy lifetime.
2. No linkage to gross profits/margins.
3. Simplified and more comparable across insurers.

6. Disclosures – Transparency Upgrade

1. Extensive new disclosure requirements:
   1. Roll forwards of reserves, DAC, MRBs.
   2. Assumptions, methodologies, and sensitivity analysis.
   3. More granularity to enhance investor understanding.

7. Impact on Life Insurance Companies

1. Earnings volatility increases (due to updated assumptions).
2. Balance sheet is more market sensitive (OCI captures rate changes).
3. Comparability improves across insurers.
4. Requires system upgrade.
5. Greater actuarial-finance collaboration is needed since GAAP valuation becomes dynamic, not static.

Summary

The new face of LDTI is about unlocking assumptions annually, fair valuing guarantees, simplifying DAC, and bringing transparency through disclosures. It transitions life insurance accounting from a locked-in, opaque model to a dynamic, market-reflective, and comparable framework. However, the new model also brings increased volatility compared to the previous framework.

Note: The author, Pulkit Pruthi, is an associate principal at Accenture, India