Auctiva really should put a big link on the front of their page that explains how it works. It's almost like they try to hide it for some reason...
Basically, everything is completely FREE to use, HOWEVER... Auctiva sells alternative shipping insurance by a company called U-PIC. They get a discount on this insurance, and this discount is passed on to you.
For example, a buyer wants insurance on a total purchase of $25. They pay $1.30 for the insurance. Depending on your settings, Auctiva automatically insures the package, or you manually purchase insurance through Auctiva's "Transactions" screen. Auctiva only charges you $1.05 for the insurance, leaving you with a profit of $.25. Auctiva gets the insurance from U-PIC for less than the $1.05 that they charged you, so the difference is their profit. You then get billed from Auctiva monthly for your outstanding balance.
It's a pretty brilliant idea, if you ask me.
Edit: It should be noted that U-PIC insurance is far superior to USPS's offering.