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Term: Captive Value Added (CVA)

7 Nov 2015

DEFINITION of ‘Captive Value Added (CVA)’
The financial benefit that an organization would gain by using a captive insurance model. Captive value added, or CVA, allows the organization to look at both the subjective and objective benefits that participating in a captive program can bring.

BREAKING DOWN ‘Captive Value Added (CVA)’
A captive insurance company provides a specialized form of insurance to its owners and participants, who often require less insurance coverage than the general public. It is different from both self-insurance, which large organizations may use to finance some of their risks, and commercially available insurance, such as property or liability policies.

Captive programs are typically associated with larger organizations. Sizeable organizations are more likely to see a bigger impact from captive value added analysis, as they have a greater opportunity to weigh the impacts that a captive program can have on their business model. Larger organizations are also better able to absorb losses, making them a better candidate for captive insurance since captive insurance programs tend to offer lower levels of coverage.

Companies can determine the value of using captive insurance by calculating the captive value added. This can be calculated by finding the net present value (NPV) of the costs (including tax costs) associated with using a captive program compared to self-insurance and commercial insurance programs. This allows the company to determine whether a captive program will help the company control the risks associated with a new venture, for example.

Another model that companies use to calculate the potential financial impact of captive insurance is the value of risk (VOR). This technique views the costs of risk in terms of how it can help the company complete its objectives. Value of risk looks at how shareholders and other stakeholders will see their values impacted by the company taking on activities that are known to carry some risks.

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