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
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
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
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.
To print this article, all you need is to be registered on Mondaq.com.
Click to Login as an existing user or Register so you can print this article.
In the milieu of global financial markets, securities of various types are often classified as either ‘listed’, ‘unlisted’ or ‘quoted’.
Some comments from our readers… “The articles are extremely timely and highly applicable” “I often find critical information not available elsewhere” “As in-house counsel, Mondaq’s service is of great value”
Register for Access and our Free Biweekly Alert for
This service is completely free. Access 250,000 archived articles from 100+ countries and get a personalised email twice a week covering developments (and yes, our lawyers like to think you’ve read our Disclaimer).