The Asset Valuation Reserve (AVR) is a U.S. statutory capital account used to offset unexpected investment asset equity or credit losses in order to mitigate the business risk that insurance companies cannot meet their obligations. The AVR is comprised of a default and equity component. The National Association of Insurance Companies requires U.S. domestic insurers to maintain an Asset Valuation Reserve to cover policyholder claims in the event of financial issues at the insurer.
The AVR can also reflect estimates of future losses for the company. Debt and equity capital gains and losses, whether realized or unrealized, are factored as debits or credits towards the AVR. The SLOPE company variable names below summarize the AVR calculation:
Asset Valuation Reserve = AVR Equity + AVR Default
In general, the AVR Equity and AVR Default company variables each depend upon the following three basic considerations
- Maximum Reserve
- Accumulated Balance
- Reserve Objective
In particular, the AVR Equity and AVR Default company variable formulas displayed below are each limited to either the AVR Default Max Reserve or AVR Equity Default Max Reserve company variables.
1) AVR Default = 80% Default Accumulated Balance + 20% Default Reserve Objective
2) AVR Equity= 80% Equity Accumulated Balance + 20% Equity Reserve Objective
The AVR factors are read from the SLOPE Table Structure named AVR & RBC Factors and depend upon the following two indices that must be defined at the individual set level:
- AVR Component (Equity or Default)
- AVR Line Number
The AVR Line number represents the corresponding line number from the NAIC Annual Statement blank which the asset would be reported on. Note that the line numbers are re-used between the Equity and Default components in the annual statement blank, so the AVR Component and Line Number must be applied consistently in order to get the appropriate AVR factors.
The maximum AVR for any projection month ranges between zero and a maximum percentage amount applied to the statutory reporting basis for each investment asset, which is represented by the US Stat Reported Value product variable. The factors used to calculate this are found in the Maximum Reserve field within the SLOPE Table Structure named AVR & RBC Factors as previously described.
The accumulated AVR balance reflects the cumulative sum of monthly factors that vary by investment asset category and are applied to the investment asset value within US Stat Reported Value. Monthly factors are located in the Basic Contribution field within the SLOPE Table Structure named AVR & RBC Factors as previously described.
The AVR reserve objective reflects a target AVR reserve factor that varies by investment asset category and is applied to each investment asset's value within US Stat Reported Value. These factors are located in the Reserve Objective field within the SLOPE Table Structure named AVR & RBC Factors as previously described.