Although there are three industrial insured captives in Florida, there are no domestic ones, despite the fact that the state’s captive insurance legislation, which allows for the creation of both, came into effect in 1982.
Although there are three industrial insured captives in Florida, there are no domestic ones, despite the fact that the state’s captive insurance legislation, which allows for the creation of both, came into effect in 1982.
“It is not unusual for it to take some time before a new domicile begins licensing captives”, says Patti Pallito, director at Aon Risk Solutions.
“Once the first captive is licensed, a precedent is established, and others tend to follow. Florida seems to have made a commitment to attract captives; it’s had captive legislation in place for some time. However, last year, the Florida legislature decided to modernise the statutes and make them more competitive.”
In July 2012, a new law came into effect to attract potential insurers. House Bill 1101 specified criteria for the formation, incorporation, coverage, reporting, licensure and reinsurance of captive insurers.
Kevin McCarty, Florida’s insurance commissioner, encouraged the implementation of the new legislation, saying: “We welcome captive insurers to Florida’s insurance marketplace. The new law will encourage the formation of new captive insurers, which will promote increased investment in our insurance marketplace.”
Belinda Miller, general counsel at the Florida Office of Insurance Regulation, says that House Bill 1101 was implemented because a number companies interested in forming a captive that were interested in domiciling in the state stressed the stringency of its law to legislators.
The changes that were brought about by House Bill 1101 have yielded positive results. She says: “We’re expecting relatively slow moderate growth. Currently we have two companies that have been talking to us about forming a captive and one re-domestication from another state.”
There are now more than 30 states in the US with captive legislation in place, so there generally needs to be a compelling business purpose for establishing a captive in a new, untested jurisdiction and foregoing a ‘tried and true’ domicile, explains Pallito.
“This could be regional proximity to the insureds, the requirement for admitted paper, a specific nuance in the respective captive law, etc. Aon works closely with our clients to understand the mission and objectives for their proposed captives, and we then recommend domiciles that are best suited helping them achieve their goals.”
Mark Ouimette, managing director at Beecher Carlson, thinks that Florida is anxious to put some captives on its books to prove that it is a legitimate domicile option that should be considered. He also says up-and-coming domiciles face difficulties when trying to establish themselves.
He says: “I feel it is very difficult for any new domicile to establish itself in the current market. The captive business is far more mature than it was just 10 years ago and some domiciles have become very successful attracting new captives through the use of a multi-platform marketing approach.”
“The State of Florida has a large population, strong business climate, an excellent tourism infrastructure and is home to many household names in corporate America. I feel the best way for them to initially compete will be through a homegrown ‘we’re open for captive business’ campaign that focuses on the agent, broker and risk manager community in Florida.”
Miller says that while the Florida Office of Insurance Regulation was amenable to modifications to the law that would satisfy and secure some captives in the state, it is less welcome to those that aren’t genuine.
She says: “What we aren’t looking for in our market are captives that are not real. We’ve had a series of companies that claim to be exempt from the Florida Certificate of Authority, which aren’t really insuring themselves but advertising for everybody else.”
Florida is limiting its exposure because of this and focusing purely on clients that are genuinely interested in setting up proper captive companies.
It also wrote exemptions into House Bill 1101 that would protect the state and companies that do business there.
Under the law, captives cannot write life and health insurance. Miller says that life insurance has been omitted because policies are very long tail and solvency requirements surrounding a true life insurance company are “particularly important and people depend on that coverage”.
Health insurance has been omitted because the state has had bad experiences with multiple employer welfare arrangements (MEWA)—when a group of employers pool their contributions in a self-contributing benefit plan for their employees—in the past.
Miller says: “Companies became insolvent and in some instances they were assessable and so the receiver had to go back and try to assess people to pay medical claims. It was an absolute mess.”
Opening up its borders to agreeable captives through relaxation of its law does not mean that the state will go easy on them in the future. Miller says: “We want a successful programme, we’re not looking to take the most risk”.
What will be, we’ll see
While domiciles such as the State of Vermont dominate the market, Miller insists that Florida’s intentions for entering the industry aren’t based on competition.
“We’re not getting into this to have more captives than Vermont or Delaware. If a company wants to form a captive here we would like to facilitate that and make it successful. We’re not doing it just for the annual convention requirement and it’s not really a revenue builder in itself. [Our aim] is to facilitate businesses located in Florida to set up operations here.”
Though competition may not be high on Florida’s agenda, it does need local infrastructure in place if captives are going to set up shop and stay in business. Miller says that the state’s existing resources are adequate for the time being, and once captives have been formed, additional infrastructure plans will then be put into action.
Ouimette insists that a ‘go to’ individual, who can represent the state and convey its captive mission, is paramount when establishing a successful infrastructure.
“[Florida] will also need to identify whether things like new captive application review, actuarial review and company examinations will be handled within the Florida insurance department or outsourced to qualified third parties. Some domiciles have built their reputations on consistent, predictable processes that captive managers and formation consultants know they can rely on with respect to their clients. While it is to be expected that there will be a few issues initially, there are some excellent US domiciles that Florida could use as an example of proper infrastructure.”
Pallito adds: “Nearly all of the nationally recognised brokers have offices in Florida, as do the other usual captive service providers—auditors, actuaries and attorneys. Once Florida has established that it is a captive friendly jurisdiction, these service providers are poised to quickly have dedicated staff in the state to service the new companies”
Ouimette says that successful domiciles find a way of balancing “firm regulatory scrutiny with an open-minded bullish approach to captive formations and growth”. He adds that if Florida can achieve this balanced approach to new licensures, then quality formations will follow.
Something that could get in the way of new formations is Dodd-Frank’s Non-admitted and Reinsurance Reform Act (NRRA), which organises the way that premium taxes are collected from surplus lines insurance companies. It has been concern for domiciles because clarification as to whether it applies to captives is still undecided.
But they received a boost recently when Judy Biggert, the departing chair of the House of Representatives Sub-committee on Insurance, which initially drafted the NRRA law, wrote a letter to her replacement confirming that it was not intended to apply to captives.
Pallito says: “The hope is that the new chairman, Jeb Hensarling, will take up Biggert’s recommendation to eliminate ambiguity in the NRRA around direct placement tax remittance. However, it should be remembered that the NRRA did not change the potential underlying tax obligations of captive insureds that existed before Dodd-Frank was passed into law.”
Indeed, Ouimette says that the clarity of the NRRA may have derailed some potential re-domestications of existing captives.
“Premiums paid by Florida insureds to a foreign captive insurance company may have been subject to self procurement tax before NRRA’s enactment and may be if a technical amendment excluding captives is passed by congress,” explains Pallito. “While Florida’s tax rate of 1.75 percent on premiums written by domestic captives is much higher than that of other jurisdictions, it is much more favorable than the 5 percent assessed on surplus lines premiums and self procured coverages.”
“Whether or not NRRA applies to premiums paid to captives, if an organisation has significant risks in the state or is headquartered there, establishing a Florida captive may offer substantial premium tax savings. Given its favourable business environment, potential tax savings, and the state’s apparent commitment to captives, we anticipate that Florida will attract new companies quickly.”
Mary Mostoller, director of company admissions at the Florida Office of Insurance Regulation, is looking forward to the state licensing its first captive.
She says: “Florida is excited about the 2012 changes in its captive law and looks forward to welcoming its first captive since the legislation went into effect 1 July 2012.”
