After several decades, Florida is back in the business of licensing captive insurance companies. On Aug. 11, 2016, the Florida Office of Insurance Regulation issued a license to a nonprofit Florida corporation, pursuant to Chapter 628, Part V, Florida Statutes, to write medical malpractice, other liability and miscellaneous casualty. It was the first license issued to a domestic captive insurer since 1988, pursuant to a Florida statute last amended in 2013.
Captive insurance can be characterized as a form of self-insurance. It enables companies with excellent claims histories due to strong compliance programs to retain the benefits of their good risk management practices, rather than pay out the benefits to independent insurance companies. Captives enable companies to turn their risks into rewards and to obtain coverage for risks that would otherwise be commercially unattainable. Pure captives are wholly owned by the insured and act just like any commercial insurers, issuing policies, collecting premiums and paying claims, but not offering insurance to anybody but the owner, so the only claims history that matters is the owner's, as opposed to the industry's claims history as a whole, albeit sometimes the owner is a group of entities. The owner or group of owners benefits when its claims history beats the industry's claims history.
Most captives have been licensed in recent years in the states of Vermont, Utah, South Carolina, Delaware or Tennessee, or overseas in Bermuda, the Cayman Islands, Barbados and Guernsey. Overseas captives are appropriate in the context of particular risk management needs, but many companies are organized domestically to accommodate particular regulatory and risk considerations. Regulatory authorities in the most common captive domiciles are considered experts and constructive participants in the regulatory process. Now, Florida also is open for business, equally constructive and interested in building a captive industry in the Sunshine State to benefit local companies and stimulate business tourism as a result of the minimum mandatory annual meeting requirement.
Captives are especially attractive in Florida due to the relatively high property insurance rates. Under the Florida Insurance Code, the only lines captives may not ordinarily insure include workers' compensation and employer's liability, life, health, personal motor vehicle and personal residential property insurance. Nonprofit captives may qualify as tax-exempt. Captives that do not qualify as tax-exempt may receive tax-advantaged treatment under 28 USC §831(b). So-called "831(b) captives" are taxed on their investment income only, as long as the company receives no more than $1.2 million in premium each year ($2.2 million, indexed for inflation, starting in 2017), without impacting the deductibility of the premiums paid by the owner to the captive. Of course, these so-called "831(b) captives" must also meet other legal requirements, including, but not limited to, "risk shifting" and "risk distribution."
Captives are appropriate for mid- to large-sized entities or associations of similar entities. They can be organized as nonprofit or for-profit entities. Under Florida law, a pure captive that is organized as a nonprofit entity must demonstrate net assets of at least $250,000 and initial unimpaired paid-in capital of at least $100,000 for a pure captive insurance company and $200,000 in the case of an industrial insured captive insurance company. For pure captives organized as for-profit entities, the minimum funding requirements consist of unimpaired paid-in capital of at least $100,000 and unimpaired surplus of at least $150,000. The application process requires a company to demonstrate its claims history and prove that it will manage the captive professionally. Ordinarily, qualified vendors can provide these services to the captive with substantial net benefit to the insured.
Captive insurance may sound complex, but experienced attorneys, actuaries, managers, claims handlers and audit/tax consultants can help take away the guesswork by estimating and managing the insurance risks. Required reinsurance provides a backstop against unlikely 10-year or more catastrophic events. Reinsurance intermediaries can readily interest the reinsurance market in solidly designed captives. Nearly every industry can benefit from captives, but a few that may especially benefit include healthcare, hospitality, property development, energy and education.