Actuarial Lingo–Terms and Acronyms

By Shirley Song

The list below summarizes the actuarial terms and acronyms commonly used in various insurance practices, including Life, Property/Casualty, Investment, etc. The article serves the purpose of introducing some basic actuarial lingo to professionals with different fields of expertise.

CALM: Canadian Asset Liability Method
Statutory Reserves in Canada are determined using the CALM, a principles-based method that is significantly different from the deterministic approach used for the statutory reserves in the United States. The reserve is calculated after adding a margin for adverse deviation to each of the assumption made (i.e., mortality, lapses, expenses, etc), future asset and liability cash flows are then projected under various interest rate scenarios. CALM reserves liabilities are calculated at the group policy levels that reflect the insurer's asset-liability management practice.

CRVM: Commissioners' Reserve Valuation Method
CRVM is a very important method used by life insurance companies in setting statutory reserves. In the 1940's, all states passed the uniform standard valuation laws establishing a modified reserve basis called the CRVM. The method is to be used with specified interest and mortality rates which vary by states, by issue date and by policy terms.

CARVM: Commissioner's Annuity Reserve Valuation Method
CARVM is similar to CRVM, but it is used for annuities.

DAC: Deferred Acquisition Costs
Commonly used in the insurance business, DAC describes the practice of deferring the large upfront cost (i.e., commission expenses, underwriting costs, etc) at the issuance of new business over the duration of the insurance contract. The acquisition costs are recognized as an expense item by reducing the DAC asset. The process of recognizing the costs in the income statement is defined as "amortization" and refers to the DAC asset being amortized, or written-off.

Greeks:
Greeks are often used in financial mathematics. They represent the sensitivities of derivatives to a change in underlying parameters on which the value of an instrument is dependent on. For example, Delta represents the rate of change of option value with respect to changes in the underlying asset's price. Rho measures sensitivities of derivatives with respect to changes in interest rates.

GMDB: Guaranteed Minimum Death Benefit
GMDB on a VA (Variable Annuity) product provides policyholders a guaranteed specific monetary sum upon death during the term of the contract. The death benefit may simply be the original premium. The GMBD guarantee may also compound at a fixed rate of interest. Other more complicated formulae in calculating policy guarantees are commonly used as well.

IBNR: Incurred But Not Reported
IBNR reserves play a significant role in the casualty insurance written. The insurance company maintains reserves in an amount estimated to provide payment of claims incurred on or prior to the date of settlement. The claims are unpaid as of such date and for which such insurer may be liable, though the losses are not reported as of the valuation date.

RBC: Risk-based capital
Risk-based capital is a method developed by the NAIC to measure the minimum amount of capital that an insurance company needs to support its overall business operations. Various risks assumed by life insurance companies are weighted and an appropriate capital requirement is assigned for those risks. The uniform NAIC RBC system helps to raise a safety net for insurers and provides regulatory authority for timely action.

Shirley Song is an actuarial candidate working in the Financial Risk Management team at Milliman Inc. in Chicago.