U.S. insurance companies are preparing for the impact of Accounting Standards Update No. 2018-12, Financial Services—Insurance (Topic 944): Targeted Improvements to the Accounting for Long-Duration Contracts (LDTI). The new standards are set to go into effect for public companies for fiscal years beginning after December 15, 2022, and will result in significant changes to financial measures for insurance companies issuing long-duration contracts (e.g., life insurance, disability income, long-term care policies and annuities).
Compensation professionals will need to take action to understand and prepare for the impact of LDTI. Among other changes, LDTI requires that assumptions used for calculating accounting values be updated annually (or more frequently) for all products, whereas current generally accepted accounting principles (GAAP) standards use “locked-in” assumptions throughout the life of a policy for many types of products. This change could drive increased volatility and complexity in financial measures commonly used in incentive plans (including income-based and return measures). Of particular importance for incentive planning, financial reporting for fiscal year 2023 and beyond will not be directly comparable to pre-2023 reporting, and any financial goals set prior to 2023 might not be relevant.
In the near term, companies might want to consider possible approaches to 2022 long-term incentive plan (LTIP) awards that address the challenges caused by the accounting changes. In-progress LTIP grants with performance periods carrying into fiscal year 2023 will also need to be cared for. More generally, companies will want to revalidate whether current incentive designs remain appropriate and whether measures, performance periods, goal setting, and use of adjustments or discretion need to be reconsidered.
A high-level action plan is outlined below. Key stakeholders (i.e., executive leadership and the board of directors) should be kept informed of the rule and potential approaches before soliciting their feedback and approval. A close partnership with finance and other areas of the organization (i.e., legal, human resources, investor relations) will be critical. Finally, a successful implementation will require developing and executing on a change management and communication strategy.
If you have any questions on the accounting changes or on implications for incentive plan design, please do not hesitate to reach out to the authors or another trusted Willis Towers Watson partner.
