Protected cell rent-a-captive arrangements are a variation of the captive model. In a rent-a-captive structure, an insurance company establishes a rent-a-captive company and typically owns 100% of the captive company's voting common stock. The captive company "rents" its capital, surplus, and license to multiple insureds and usually provides administrative services, reinsurance, and/or a "fronting" company (i.e., an arrangement between two or more insurance companies whereby one company issues a policy and then cedes all risk to the other company). The experience of an individual insured "renting" arrangement is protected from the other insureds "renting” arrangements through a “protected cell” contract. This contract creates a legal segregation of the accounts of each insured from the liabilities of every other insured and those of the rent-a-captive itself. Typically, investment risk on assets transferred by an individual insured to the rent-a-captive and underwriting risk related to business assumed by the rent-a-captive are transferred back to the individual insured through various mechanisms. In such situations, the insured should record the amount invested in the rent-a-captive as an asset, classified in accordance with its legal nature, and record losses incurred and a related liability for any underwriting risk retained. The asset should be valued based on the terms of the contract, and considering the embedded derivative requirements of ASC 815 as appropriate. It may be appropriate for the insured to consolidate its protected cell under the "silo" provisions in ASC 810-10-25-57; however, this only applies when the protected cell captive is itself a VIE. See CG 2 for guidance on "silos" and the variable interest model.

An entity may participate in an industry captive or other captive with multiple owners formed to pool risks and potential reinsurance pricing power. Payments to the captive entity have two components: (1) an investment component helping fund the equity of the entity and (2) an insurance premium component paid in return for insurance coverage for the period. Generally, in this type of structure, the entity has rights indicating significant influence over the captive's operations. If so, the equity method is appropriate for the capital infusion component. This may result in offsetting some of the benefit of the entity’s claim reimbursement under the insurance component and also recognition of the shared part of other members’ losses. See CG 3 and CG 4 for further information. Accounting for investments in common stock involves significant judgment.

Companies insured under these types of arrangements must determine whether the economic substance of the captive is sufficient to transfer risk of loss from the insured to the captive. If the insured determines that risk is transferred, the accounting for the insurance contract will be the same as if the coverage was provided by an independent insurer. If the economic substance is not sufficient to transfer risk of loss, the provider is in effect uninsured and deposit accounting would be appropriate.

If the insurance policy issued by the captive is claims-made or retrospectively rated, see PPE 8 for additional considerations. Additional guidance applicable to health care organizations that utilize captive insurance arrangements is provided at ARM 9592.823.

Separately prepared captive company financial statements should comply with the GAAP requirements specific to the insurance industry (see ASC 944, Insurance). The guidance on discounting of loss reserves of captive insurance companies is consistent with discounting by other insurance companies (see IG 4.3.3).

If a non-insurance entity has a wholly-owned captive subsidiary, all related party transactions, including the insurance transactions, will be eliminated upon consolidation, and self-insured liabilities will be reported in the consolidated balance sheet. Although ASC 810-10-25-15 generally requires specialized industry accounting of subsidiaries to be continued by the parent upon consolidation, this only applies to transactions that do not eliminate in consolidation. Judgment needs to be applied when the captive is not wholly owned. This could result in differences between the accounting reflected in the captive’s stand-alone financial statements and that reflected in the parent entity's consolidated financial statements, given that the captive would apply specialized industry accounting. For example, with regard to discounting of reserves, the non-insurance enterprise would apply the discounting guidance in ASC 450-20-S99-1 (SAB Topic 5.Y) while the insurance entity would apply the guidance in ASC 944-20-S99-1 (SAB Topic 5.N). With regard to balance sheet classifications, insurance companies generally do not report classified balance sheets, unlike non-financial services companies.

A captive insurance subsidiary may engage in lending transactions with its parent under formal agreements. Such agreements may result in the recognition of an asset (note receivable) in the captive’s stand-alone financial statements prepared in accordance with US GAAP. An important factor in making the determination of whether the note receivable should be recognized as an asset or as a component of equity is the source of the funds that are lent. When the captive has sufficient internally generated cash flows to support lending and the note is of a form that generates a return to the investor and a maturity date, it may be appropriate for the transaction to be accounted for as a debt instrument. However, if the amount loaned, or any portion thereof, represents the "lending" of contributed capital, that portion of the transaction should be presented as a reduction of capital, not as a debt investment. When presented as a reduction in equity, "interest" should be recognized as a capital contribution upon receipt. It would not be appropriate to accrue a capital contribution unless the accrued interest receivable is also presented in equity.

Lending of contributed capital presented as a reduction of capital is derived from ASC 505-10-45-2, which states that, when an enterprise receives a note rather than cash as a contribution to equity, the note receivable should generally be reported as a reduction of shareholders' equity, except in very limited circumstances. See FG 4.5 for additional information. The substance of the transaction, rather than its timing or legal form, should be considered when determining the appropriate accounting. For example, the accounting result should be the same whether the captive receives capital in the form of a note or physically receives cash as a capital contribution but then returns that cash to the parent in the form of a note, because there is no substantive difference in these transactions.

The ultimate determination of whether a note receivable should be treated as an asset or a return of capital is highly judgmental, and should consider all relevant facts and circumstances. FG 4.5.2.1 lists other factors that should be considered in making the determination.

In circumstances when a captive insurance company receives premium payments that exceed the liability it assumes at the time the contract is executed, the difference between the cash received and the liability assumed generally would not be accounted for in the captive’s stand-alone financial statements as a capital contribution. The captive would consider the provisions of ASC 944 in determining how to account for the contract. When such excess exists, the captive should consider whether it is possible that the risk transfer criteria of ASC 944-20-15-40 through ASC 944-20-15-54 are not met and that deposit accounting should be followed. If the transaction represents a deposit, no premiums or loss expense would be recognized at inception or throughout the term of the contract, and the deposit accounting guidance in ASC 340-30 would instead be applicable. If the transaction does qualify for insurance accounting, the captive cannot record an immediate gain when it enters into the contract; any gain must be deferred and amortized over the settlement period of the contract. There is no specific guidance in ASC 944 for an insurer or assuming company accounting for coverage of past incurred events (the only guidance in ASC 944 on retroactive coverage relates to the ceding company accounting), as no service has been provided at inception of the contract immediate gain recognition is not appropriate.

For accounting purposes, such transactions are generally not deemed to be merely a "transfer" of an asset or a liability. Rather, the distinguishing feature for accounting purpose is the existence of an insurance contract between related parties. Because ASC 850, Related Party Disclosures, does not require imputation of arms-length terms in related party transactions, in most circumstances the insurer should not impute a capital contribution for the difference between the liability assumed and the cash received in its separate company financial statements. Robust disclosure of the related party transaction should be included in the footnotes to the financial statements as required by ASC 850.