Corporates and insurance companies often enter into cell captive arrangements. IFRS 10 Consolidated Financial Statements (IFRS 10) and IFRS 4 Insurance Contracts (IFRS 4) may impact the accounting of these arrangements.

What is a cell captive arrangement?

A registered insurance company ("insurer") and a corporate ("cell owner") enter into a shareholder's agreement in terms of which the corporate "purchases" a cell captive ("cell"), which is an insurance vehicle created by the insurer.

The insurer's insurance license is extended for use by the cell owner for the insurance of:

  • its own assets, for example its own buildings ("first party cells") or
  • the assets and/or lives of its customers or employees, for example cell phones of customers of a cell phone network provider ("third party cells").

First party cells

Generally, the cell owner is responsible for the funding and solvency of the cell, hence claims are limited to funds available in the cell. Therefore, there is no risk transfer to the insurer. The cell owner is entitled to the net amount of the funds in the cell. If there are no funds left in the cell, the cell owner will be required to recapitalise the cell. The assets allocated to the cell are not protected from claims of other creditors of the insurer in the event of liquidation of the insurer.

Third party cells

Generally, claims instituted by customers are not limited to the funds allocated to the cell. The insurer is required to use other funds to settle claims of a particular cell if there are inadequate funds in that cell. The cell owner will then have the obligation to recapitalise the cell – i.e. make good any losses. If there are excess profits in the cell, the cell owner is entitled to them. The assets allocated to the cell are also not protected from claims of other creditors of the insurer in the event of liquidation of the insurer.

Consolidation of cells

IFRS 10 establishes a single control model applicable to all investees. An investor controls an investee when the investor is exposed or has rights to variable returns from its involvement with the investee and has the ability to affect those returns through its power over the investee.

An investee considered for control could be a legal entity or a portion of a legal entity, often called a silo. A silo has specified assets, which can only be used for, and that are the only source of payment of the specified liabilities, in the silo. All the assets and liabilities of a silo are legally ring-fenced from the rest of the legal entity.

Do the cells meet the definition of a silo?

The first party and third party cells do not meet the definition of a silo as the assets and liabilities of the cells are not legally ring-fenced from the rest of the insurer.

How will this impact the cell owner's accounting?

The first party and third party cell owners will no longer consolidate the cells.

The first party cell owner has effectively made a deposit with the insurer, which it uses to cover losses on its own assets and withdraws the balance upon termination of the arrangement. The deposit should be accounted for as a financial asset. If the cell owner has to recapitalise the cell, it should account for a financial liability.For third party cells, the cell owner is acting as a reinsurer if significant insurance risk is transferred. The cell owner would need to account for this reinsurance contract issued in terms of IFRS 4. This view may have a significant impact on the separate financial statements of the cell owner, because most have not been applying IFRS 4 in the past.

For third party cells, the cell owner is acting as a reinsurer if significant insurance risk is transferred. The cell owner would need to account for this reinsurance contract issued in terms of IFRS 4. If there are excess profits in the cell, the cell owner should account for an insurance asset. If the cell owner has to recapitliase the cell, it should account for an insurance liability.

This view may have a significant impact on the separate financial statements of the cell owner, because most have not been applying IFRS 4 in the past.

How will this impact the insurer's accounting?

The "deposit" of the first party cell owner should be accounted for as a financial liability. If the cell owner has to recapitalise the cell, the insurer should account for a financial asset.

If the third party cell owner assumes significant insurance risk, the cell owner is an in-substance reinsurer. The insurer will account for this reinsurance contract in terms of IFRS 4.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.