November 10, 2021
Insurance Co’s: Accounting Change May Affect LTIPs
Insurance companies are facing a new accounting standard for “long-duration contracts” that will go into effect for fiscal years beginning after December 15th of next year. That may seem far off, but if you’re in that industry, you need to start preparing now for how it’ll affect your existing & future incentive awards. This Willis Towers Watson memo explains:
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.
The memo goes on to outline steps to take beginning this quarter, as well as in the medium- and longer-term timeframes. It recommends partnering closely with finance & HR and keeping executives & directors informed of the rule & potential incentive approaches before submitting changes for approval. As always, you’ll also want to have a robust change management & communications strategy so that people understand what’s happening and aren’t caught by surprise.
– Liz Dunshee