Commissioners' Annuity Reserve Valuation Method (CARVM)

What Is the Commissioners' Annuity Reserve Valuation Method (CARVM)?

The commissioners' annuity reserve valuation method (CARVM) is a method used to calculate the statutory cash reserves for an annuities carrier.

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.

Understanding the CARVM

CARVM calculations do not include expenses or lapses in annuity policies. However, they do include any nonforfeiture benefits that exceed premiums that are required in the future. By state law, these reserves must be maintained by every annuities carrier.

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).

The National Association of Insurance Commissioners is an industry body tasked with enforcing reserve standards for annuities contracts in order to ensure there are guaranteed benefits for holders of annuities.

Calculating the CARVM

Using the CARVM, the actuarial reserves of an annuity are calculated as:

"the greatest of the respective excesses of the present values..., of the future guaranteed benefits, including guaranteed nonforfeiture benefits, provided for by the contracts at the end of each respective contract year, over the present value, at the date of valuation, of any future valuation considerations derived from future gross considerations..."

In other words, the CARVM value of an annuity is the greatest difference between a policy's guaranteed benefits, and its expected premiums, for each remaining year of the policy. This includes any expected payouts if the holder of the policy were to surrender their benefits.

This is the greatest amount a policy-holder would be entitled to in any given year, and therefore the minimum reserve necessary. The calculation is significantly more complex for other types of policies, and may factor in probabilities or mortality tables.

Enforcement of CARVM

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.