Filed Under:Risk Management, Captives

Will Florida Become the Next Major Venue for Captive Insurers?

Proposed Legislation Could Bring Significant Change to the State’s Captive Environment

The scope of captive insurance in Florida could be significantly expanded if captive-specific legislation pending in the 2011 Florida Legislature is ultimately enacted.
Although no licensed Florida captives currently exist, state law presently allows for the creation of ”captive insurers” and “industrial insured captive insurance companies.” Both of the currently filed bills, HB 1235, sponsored by Rep. Jeanette Nunez, R-Miami, and its identical counterpart, SB 1836, introduced by Sen. Miguel Diaz de la Portilla, R-Miami, would change Florida’s requirements for both currently authorized captive insurers and create other types of permitted captive insurance companies. 

HB 1235 and SB 1836 may spur captive development in Florida as a result of the lowering of captives’ capital and surplus requirements, as well as the expansion of the types of captives permitted in Florida, including the creation of a “special purpose captive insurance company.”  

Generally, a special purpose captive would only insure risks of its parent, affiliates and certain unaffiliated companies, but could provide both insurance and reinsurance for other risks as approved by Florida’s insurance commissioner. Importantly, only special purpose captives would be able to provide personal motor vehicle insurance, homeowners insurance or a component thereof, if approved by the commissioner.

Organized as a stock company, the current permitted captive insurer—designated as a “pure captive insurance company” under the proposed legislation—would be required to possess and maintain unimpaired paid-in capital of at least $100,000, along with unimpaired surplus of at least $150,000. Organized as a non-profit corporation, a pure captive would be required to have unrestricted net assets of least $250,000. Under current Florida law, a captive insurer is required to possess and maintain unimpaired paid-in capital of at least $500,000 and unimpaired surplus of at least $250,000. If organized as a reciprocal, captives, including a pure captive, would be required to possess and maintain unimpaired surplus of $1 million, regardless of type.

Under the proposed law, an industrial insured captive insurance company incorporated as a stock insurer or as a limited liability company would be required to have unimpaired paid-in capital of at least $200,000 and unimpaired surplus of at least $300,000. As a mutual insurer, it would be required to possess and maintain unimpaired surplus of at least $500,000. With the enactment of HB 1235 or SB 1836, capital and/or surplus requirements for industrial insured captives would drop significantly, as indicated by the foregoing, from the current minimum requirement of $20 million in unimpaired capital and surplus.

Employment Opportunities
Although HB 1235 and SB 1836 would not require captive insurers to use captive managers or management companies with Florida offices (as states such as Arizona do), the bills do require captives to have a principal office in Florida. This would foreseeably open the door for the statewide establishment of such captive management offices and companies.

Depending upon how Florida’s insurance commissioner might ultimately interpret the legislation, captive management companies or captive managers could be established in Florida, or existing ones could create offices in Florida to serve as principal captive insurer offices, even in the absence of a reference to a captive management company or a captive manager within the law.

The pending bills could have further positive economic impact in Florida through the costs and fees associated with the legislation’s various captive- specific requirements, such as state licensing, maintenance of a principal place of business in Florida or, in the case of a branch captive, maintenance of the branch operation’s principal place of business in Florida. The legislation further requires one board of directors meeting, one subscribers’ advisory committee meeting or one meeting of the managing board, if a corporation, reciprocal or limited liability company, respectively, to be held in Florida. Captives also would have to appoint a Florida-resident registered agent to accept service of process.  

Licensing and Fees
Under HB 1235 and SB 1836, a captive insurance company would pay a nonrefundable $200 license application processing fee to the Florida Office of Insurance Regulation. In addition, for the review of the application information, it would pay either a reasonable fee for the commissioner’s retention of external legal, financial and examination services, or a fee of $2,400 for use of the commissioner’s internal resources. Additional fees would include an initial license fee of $300 and an annual renewal fee of $500. Attendant Florida domestic businesses such as attorneys, accountants and other professionals would benefit if the commissioner outsourced captive-related legal, financial and examination services to Florida-domiciled entities.

Florida state banks, Florida branches of Federal Reserve System member banks, and Florida-domiciled asset managers would also benefit from the legislation’s financial provisions. The proposed bills would require 35 percent of the assets of a Florida-licensed captive reinsurance company (as later defined) to be managed by an asset manager domiciled in Florida. 

Except for a sponsored captive that does not assume risk and whose capital or surplus may include high-quality securities approved by the commissioner, HB 1235 and SB 1836 would require any captive’s capital and surplus to be in cash, cash equivalents, or an irrevocable letter of credit issued by a Florida chartered bank, a Federal Reserve System member bank with a branch office in Florida, or as approved by the commissioner.

Further, the bills also would create association captive insurance companies, branch captive insurance companies, captive reinsurance companies, and sponsored captive insurance companies with protected cells. 

Details and Definitions
An association captive would only insure risks of the association’s member organizations and their affiliated companies. As a stock insurer or as a limited liability company, an association captive would have to demonstrate unimpaired paid-in capital of at least $400,000 and unimpaired surplus of at least $350,000. An incorporated mutual association captive would be required to have surplus of at least $750,000. 

Branch captives, formed to write insurance business for parent companies and affiliates that are licensed under the laws of an alien jurisdiction and subject to statutory or regulatory standards imposed by the alien jurisdiction in a form acceptable to the commissioner on companies that transact the business of insurance in the alien jurisdiction, could be licensed by the commissioner to transact insurance in Florida through a business unit with a principal place of business in Florida. Branch captives would be required to securitize payment of liabilities attributable to their branch operation.

 HB 1235 and SB 1836 provide for a captive reinsurance company, which is a stock reinsurance company licensed or formed under the subject law and wholly owned by a qualified reinsurer parent company. A qualified reinsurer parent company is defined as a reinsurer authorized to write reinsurance in Florida, and which has a consolidated GAAP net worth of at least $500 million and a consolidated debt-to-total-capital ratio of .50 or less. The captive reinsurance company would be required to possess and maintain capital or unimpaired surplus of at least $300 million or 10 percent of its reserves, whichever is greater.

A sponsored captive would be similar to an offshore segregated account or protected cell company. The minimum capital and surplus would be provided by one or more sponsors, the sponsored captive would insure the risks of separate specified entities and any affiliates (participants), and the losses of the participants would be confined to the assets of a protected cell by a contract with the participant. Unless the commissioner approves otherwise, a participant could only insure its own risks through a sponsored captive.

A sponsor must be an insurer licensed pursuant to Florida law, an insurance holding company that controls such insurer and that is subject to the insurance holding company system registration laws of the insurer’s state of domicile, a reinsurer authorized or approved under the laws of a state, or a captive insurance company formed or licensed under Florida law. Under HB 1235 and SB 1836, risk retention groups could not be sponsors or participants. 

The legislation provides that the unimpaired paid-in capital of a sponsored captive may not be less than $500,000 and its unimpaired surplus may not be less than $500,000.  However, if the sponsored captive does not assume any risks (risks are held by the protected cells), the protected cells insuring the risks are homogenous, and the number of cells are 10 or less, the commissioner could, but would not be obligated to, reduce the unimpaired paid-in capital to not less than $150,000 and the unimpaired surplus to not less than $150,000. HB 1235 and SB 1836 state that business written by a sponsored captive in respect to each protected cell must be fronted by an insurance company licensed under certain jurisdictions, reinsured by a reinsurer authorized or approved by Florida, or secured by a trust fund or other assets acceptable by the commissioner.

If this legislation is enacted, Florida will join the ranks of a number of states that have broader captive insurance laws than its current law. Several states, including Delaware, Vermont, South Carolina, Montana, Hawaii, Missouri, and the District of Columbia, actively promote their captive insurance programs and, through various state-based initiatives, have brought economic growth or financial benefits to their states. (See The Captive Seven above.)

Whether HB 1235 or SB 1836 will produce economic growth or financial benefits to Florida will depend significantly upon its regulatory and business environment, not merely on a change in the law.  

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