Valani Global founders, Sarah and Nazir Valani Reflect on Progress with LDTI

An excerpt from the November 2021 Interview

How are you helping insurers with their LDTI implementation? What are the biggest challenges you are seeing with regards to this?

Insurers are seeking assistance with creating or refining models and processes with best practices in preparation for LDTI. They are encountering challenges using multiple actuarial, accounting and data software that do not seamlessly integrate with one another. LDTI has been a catalyst for insurers to consider enhancing their systems by moving towards end-to-end solutions that can better handle the increased data load, data grouping, new calculations and processes, increased detailed analysis and reporting requirements. With this strategic approach in mind, increased automation and controls within actuarial, accounting and data processes is top priority. Beyond model and process changes, insurers have moved their focus from “what are we supposed to do?” to “what does this practically look like?”. Understanding and explaining to stakeholders how assumption unlocking, future policy benefits, disaggregation of reserves, allocation of premium deficiency reserves, etc., affects how their business is reported is a complex task. Implementing a source of warnings analysis process is one way to assist insurers in understanding the drivers of change in business. This is especially important given that an increase in volatility of earnings is generally expected with the move to LDTI.

Are you finding the industry has enough granular data to meet their LDTI requirements? How can insurers access better quality data to meet the challenge?

The industry has a challenge with data and as a result we have seen that companies are choosing to implement a modified retrospective approach. The main questions insurers are encountering with data are:

• Is the required historical and output data available? Does the granularity of this data suffice under LDTI (e.g. experience analysis)? If the answer is no, simplifications will be required.
• How do we get new data requirements into the model? Is it in the right format? This will require actuarial valuation areas to work with IT professionals to build long-term solutions.

Can you name some key systems challenges insurers might face with the new rules?

Data management, specifically historical data ETL [extract, transform, and load] processes, poses a large challenge for insurers. There has never before been such a large demand to compile detailed historical data or for data systems to serve as the single truth or baseline for actuarial, accounting and finance processes. The increased demand for actuarial platforms has forced many insurers to switch to new actuarial software. It can be challenging to transfer knowledge within tight timelines and with limited project resources. As a result, insurers have asked consultants to assist employees with new actuarial platform functionality upskilling. Integrating the subledger system with the actuarial software is also a challenge as it requires coordinated testing and transfer of data between different systems to populate new disclosures required for LDTI compliance.

To what extent have insurers needed to break down business silos to advance LDTI? Is this working?

To optimise compliance of LDTI, a strong partnership between actuarial, accounting, data, IT and finance teams is required. In preparation for LDTI, many insurers have formed a multidisciplinary management and project team comprising stakeholders from each business unit. Execution of a plan and timeline created with buy in from each unit has helped to break down business silos. Tasks frequently involve more than one business unit (e.g., connect data between actuarial and finance for the ledger and disclosures) as well as a high degree of automation. The future demands for the integrated transformation of systems between actuarial, accounting, data, IT and finance teams is expected to only increase. With effective project management, insurers have created partnerships between these teams that will serve them well for years to come.

To what degree are you seeing insurers use LDTI as a catalyst for finance system modernisation? 

Insurers are taking one of two approaches when faced with changes required for LDTI: minimum compliance or strategic improvements. Insurers taking the view that changes required to move towards compliance with LDTI are an opportunity for strategic improvements have undergone finance system modernisation efforts encompassing ledger/subledger, actuarial and data warehouse transformations.

What has influenced insurer choice of liability discount curve?

Guidance under LDTI prescribes insurers to discount using a single A rated bond yield curve:

•  The standard says: “The liability for future policy benefits shall be discounted using an upper-medium grade (low credit-risk) fixedincome instrument yield.”
• Moody’s Investors Service defines a single A rated bond as follows: “Obligations rated A are judged to be upper-medium grade and are subject to low credit risk.”

There can be some differences which result in a thick or fuzzy line for A rated bond yields, where the differences result from different credit risk within the A rating and different liquidity of the bonds with the same credit rating. Some insurers think it is appropriate to use slightly higher yielding A rated instruments that have less liquidity to discount liabilities that have less liquidity, but the standard does require the use of observable inputs, and it can be challenging to get the necessary observations for illiquid bonds. The difference in the interest rate environment from issue to transition to LDTI will likely be a significant driver of reserve and balance sheet changes.

Has the industry got enough time to meet the effective date of 2023?

This implementation deadline is quickly approaching. A big push is required by SEC filers to meet the effective date of 2023 as insurers have been dealing with a lot of change in recent years, ranging from impacts of Covid-19 on their business, workforce and resources to change in regulation and transformation efforts. Leveraging lessons learnt from this initial group will be important for other insurers to meet the next effective date of 2025. ∎