What Does CARVM Mean?

Commissioners' Annuity Reserve Valuation Method (CARVM ) is a term denoting statutory cash reserves for annuities. It can be calculated according to several different methods. The cash reserve of the annuity must be greater or equal to the value calculated by the CARVM. The CARVM is equal to the greatest net present value of all future guaranteed benefits.

Key Takeaways

  • Commissioners' Annuity Reserve Valuation Method (CARVM) refers to statutory cash reserves.
  • CARVMs do not include expenses or lapses in the policy.
  • CARVMs do include nonforfeiture benefits exceeding premiums.

Understanding CARVM

CARVM calculations do not include expenses or lapses in policies. However, they do include any nonforfeiture benefits that exceed premiums that are required in the future. These reserves must be maintained by each annuity carrier according to the law of each state in which they are offered.

How CARVM Is Used and Determined

CARVM is basically a standardized way for issuers of annuities to determine the value of reserves by clarifying the assumptions and methodologies that will comply with the Standard Valuation Law (SVL).  

"For many years regulators and the industry have struggled with the issue of applying a uniform reserve standard to these contracts, and in particular some of the guaranteed benefits in annuities," the National Association of Insurance Commissioners said in a 2016 report. "Current approaches make assumptions about product design, contract holder behavior, and economic relationships and conditions. The economic volatility seen over the last few decades, combined with an increase in the complexity of these products, have made attempts to use these approaches for measuring economic-related risk less successful."

New Guidelines

New guidelines established by the NAIC "require that reserves for contracts falling within its scope be based on a minimum floor determined using a standard scenario (referred to as the Standard Scenario Amount) plus the excess over this minimum floor, if any, of a reserve, calculated using a projection of the assets and estimated liabilities supporting these contracts over a broad range of stochastically generated projection scenarios and using prudent estimate assumptions (referred to as the Conditional Tail Expectation Amount)."

Purchasers or holders of annuities, unless they are accountants or actuaries, will not be able to determine whether CARVM has been used correctly in their contract. Indeed, they wouldn't be expected to have access to the internal numbers on which the calculations are based.

However, the NAIC, which represents all of the state insurance commissioners, requires companies issuing these contracts to abide by its standard valuation methods. Each state insurance commission is tasked with oversight of insurers doing business in their state to see that the guidelines for annuity valuations are being followed and applied correctly.