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📐 '''Economic value added (EVA)''' is a performance measurement framework that, when applied in the insurance industry, quantifies whether an insurer or a specific line of business is generating returns above its true [[Definition:Cost of capital | cost of capital]] — including the often-substantial cost of holding [[Definition:Regulatory capital | regulatory capital]] against [[Definition:Underwriting risk | underwriting]] and [[Definition:Investment risk | investment risks]]. Originating in corporate finance as a tool to assess shareholder value creation, EVA has particular relevance in insurance because the capital intensity of the business and the long duration of many [[Definition:Insurance liability | liabilities]] mean that apparent accounting profits can mask genuine economic underperformance. An insurer reporting healthy [[Definition:Net income | net income]] under [[Definition:US GAAP | US GAAP]] or [[Definition:IFRS | IFRS]] may nonetheless be destroying value if its return on allocated capital falls below the risk-adjusted rate that investors and policyholders implicitly require.

⚙️ In practice, computing EVA for an insurance operation involves starting with an adjusted operating profit — typically the [[Definition:Underwriting profit | underwriting result]] plus [[Definition:Investment income | investment income]], after tax and after normalizing for [[Definition:Reserve development | reserve development]] or one-time items — and then subtracting a capital charge. The capital charge equals the [[Definition:Economic capital | economic capital]] (or regulatory capital, depending on the framework chosen) allocated to the business multiplied by the insurer's [[Definition:Weighted average cost of capital (WACC) | weighted average cost of capital]] or a [[Definition:Hurdle rate | hurdle rate]] set by the board. Under [[Definition:Solvency II | Solvency II]], the [[Definition:Solvency capital requirement (SCR) | solvency capital requirement]] often serves as the capital base for this calculation in European markets, while insurers operating under the [[Definition:Risk-based capital (RBC) | RBC]] framework in the United States or [[Definition:C-ROSS | C-ROSS]] in China may use their respective required capital figures. Some large groups, including global [[Definition:Reinsurer | reinsurers]] and composite insurers, apply EVA at the level of individual business units, product lines, or even individual [[Definition:Treaty | treaties]] to identify which segments are truly accretive and which warrant repricing or exit.

💡 The discipline EVA imposes can reshape strategic decision-making across an insurance organization. When executives are evaluated on economic value added rather than on top-line [[Definition:Gross written premium (GWP) | premium growth]] or accounting profit, the incentive structure shifts toward underwriting discipline, efficient capital deployment, and rational pricing. Segments that consistently produce negative EVA become candidates for remediation — through [[Definition:Rate increase | rate increases]], tighter [[Definition:Underwriting guideline | underwriting guidelines]], or portfolio runoff — while high-EVA lines attract incremental capital. For investors and [[Definition:Rating agency | rating agencies]], a track record of positive EVA signals that management is not merely growing the balance sheet but is creating durable value for shareholders. The framework also dovetails with modern [[Definition:Enterprise risk management (ERM) | enterprise risk management]] practices, reinforcing the principle that risk assumption is only justified when it earns a return commensurate with the capital consumed.

'''Related concepts:'''
{{Div col|colwidth=20em}}
* [[Definition:Economic capital]]
* [[Definition:Cost of capital]]
* [[Definition:Return on equity (ROE)]]
* [[Definition:Risk-adjusted return on capital (RAROC)]]
* [[Definition:Solvency capital requirement (SCR)]]
* [[Definition:Economic value]]
{{Div col end}}

Definition:Economic value added (EVA) - Revision history

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