The Sunshine State: a sleeping giant on the verge of waking up
Has the time finally come for the captive insurance industry in Florida? The newly formed FCIA thinks so, and is working to bring that expectation into reality.
Despite being one of the largest states in the country by population, economic size and insurable value, as well as having what has historically been one of the most difficult commercial insurance markets in the country, the captive insurance industry has never taken off in Florida.
The Florida Captive Insurance Association (FCIA) aims to change that. The association incorporated this year with the stated purpose of advocating for legislative and regulatory initiatives in the state and supporting and marketing Florida as “an attractive and successful captive insurance domicile”.
Although the captive insurance industry has been mostly dormant in Florida since it was first authorised in 1982, there are several reasons to view Florida as the proverbial “sleeping giant” on the verge of waking up.
Consider, for instance, the overall size and vibrancy of the Florida economy. It also benefits from the business-friendly approach of the DeSantis administration and state legislature (notably including its recent focus on insurance law reform). Then there’s the state’s many natural advantages, including its year-round warm climate, developed transportation infrastructure and relative ease of access, abundant meeting facilities and the many family-friendly amenities, not to mention more golf courses than you can shake a 5-wood at. That’s quite a list of pros.
“Florida is uniquely positioned to become a leader in captive insurance,” said Andre Teixeira, FCIA chairman of the board and chief financial officer of The Graham Companies. “With our financial strength, deep insurance expertise and pro-business climate, we have all the elements to build a world-class domicile.”
Although the FCIA has only just formed, it is proceeding on multiple tracks to grow and improve the Florida captive insurance market. The newborn Association is already developing relationships with leaders in the Florida Office of Insurance Regulation and the Florida Legislature, while simultaneously working to raise awareness of captive insurance generally, and the Association specifically, with an eye toward growing its membership.
As discussed further below, several forces are combining to create renewed interest in captive insurance in Florida in particular. The FCIA aims to build on that momentum to push the industry forward in the Sunshine State.
Following Florida’s recent emphasis on enforcement of the independently procured tax In spring 2024, a number of Florida-based businesses that owned captive insurance companies based outside the state received letters from the state’s Department of Financial Services (“DFS”). The letters alleged the DFS had information indicating that the companies were not in compliance with the reporting and tax payment obligations imposed by section 626.938, Florida Statutes.
Section 626.938, titled “Report and tax of independently procured coverages”, imposes a 5.3% tax on every insured in Florida who procures “insurance from another state or country with an unauthorised foreign or alien insurer legitimately licensed in that jurisdiction … upon a subject of insurance resident, located or to be performed within this state.” (the “IPC Tax”). The statute clarifies that, for purposes of the tax and reporting obligations it imposes, “any insurance on a risk located in this state … shall be deemed to be insurance procured, continued, or renewed in this state” subject to the statute’s requirements, even if the insurance was “procured through solicitations, negotiations, or an application occurring or made outside this state.” §626.938(2), Fla. Stat. As such, companies based in Florida that directly procure insurance (i.e., do not use the services of an agent or broker) from a captive domiciled outside of Florida for coverage of Florida-based risks are subject to the tax and reporting obligations of the statute.
The statute requires the insured to file a report with the Florida Surplus Lines Service Office within 30 days of procuring the insurance, and to pay to the State a 5.3% tax on the gross amount of premium within 45 days following the calendar quarter after the insurance is procured. Worsening matters for the unaware taxpayer, delinquent tax payments “bear interest at the rate of 6% per year, compounded annually.” § 626.938(5), Fla. Stat.
Based on conversations and a review of media coverage of Florida’s stepped-up enforcement of the IPC tax, it appears many affected parties, including recipients of the enforcement letters, were simply unaware of the tax and related reporting obligations. Although section 626.938 was enacted by the Florida Legislature in 1959, its requirements had not been strictly enforced. As a result, some entities required to pay the tax did so, but many did not.
Many Florida-based captive owners have begun to look for ways to reduce the comparatively high 5.3% tax on captive premiums, regardless of whether they had already been paying the tax or recently learned of it and view it as a “new” financial burden on their captive insurance programme. One way to do that is to move the captive to Florida.
Although the tax Florida assesses against premiums paid to Florida-based captives (1.75%) is also high when compared with the tax rates imposed by leading captive domiciles (approximately 0.4%), it is still far lower than the 5.3% IPC tax.
And as Florida looks to become a bigger player in the captive insurance industry, there is reason to believe the tax levied on premiums paid to Florida captives will come down in future. The issue is one of the FCIA’s top priorities, and discussions on the topic with the regulator and Florida state legislators are under way. As interest in the Florida captive insurance market grows, so does pressure to lower the tax rate.
Florida regulation of captive insurance
So, you might be asking yourself, what exactly does Florida law authorise with respect to captive insurance? Currently, its law authorises the following types of captive insurance companies:
1. Pure: A company that insures risks of its parent, affiliated companies, controlled unaffiliated businesses or a combination thereof.
2. Industrial insured: A company that provides insurance only to the “industrial insureds” that are its stockholders or members and affiliates thereof, or to the stockholders, and affiliates thereof, of its parent corporation. To qualify as an “industrial insured”, a company must have gross assets in excess of $50 million, procure insurance through a full-time employee or licensed agent, have at least 100 employees and pay premiums in excess of certain statutory thresholds.
3. Reinsurance: A reinsurance company that is wholly owned by a “qualifying reinsurance parent company,” which is defined as either a Florida-licensed reinsurer or a reinsurer meeting statutorily provided financial criteria.
4. Special Purpose: A captive insurance company that “does not meet the definition of any other type of captive insurance company” provided by Florida law.
§ 628.901, Fla. Stat.
Subject to restrictions depending on the type of captive involved, Florida authorises captives “to do any and all insurance authorised under the insurance code, other than workers’ compensation and employer’s liability, life, health, personal motor vehicle and personal residential property insurance.” § 628.905(1), Fla. Stat.
To conduct insurance business in Florida, a captive insurance company must: (1) obtain a licence from the Florida Office of Insurance Regulation, (2) hold at least one board of directors’ meeting in Florida annually, (3) maintain its principal place of business in Florida, and (4) appoint a registered agent to accept service of process and to otherwise act on its behalf in Florida. § 628.905(2), Fla. Stat.
The application fee for a captive insurance company license is $1,500. § 628.905(4), Fla. Stat.
The annual licence renewal fee is $1,000. Id.
Captives based in other states or countries may redomesticate to Florida upon satisfaction of all requirements of Florida law related to the organisation and licensing of a Florida captive insurance company of the same or equivalent type. § 628.905(6), Fla. Stat.
As part of the process of applying for a captive insurance company licence, an applicant must identify the service providers with which it will work (where applicable), including the captive manager, claims administrator, certified public accountant, actuary and reinsurance broker.
Bright days ahead in the Sunshine State
The Florida Captive Insurance Association is actively seeking new members to join its ranks and contribute to the effort to make Florida one of the most attractive domiciles in the world for captive insurance. The Association has established a website (https://floridacaptive.org) and encourages anyone interested in learning more or applying to join the Association to visit the site. Applications for membership can be submitted through the website.
Other states around the country, from North Carolina to Tennessee and Utah, have shown it is possible, with the collaboration of industry stakeholders, a committed regulator and a motivated legislature and governor, quickly to move a formerly inactive domicile to the vanguard of the captive insurance industry.
Florida’s government has been focused in recent years on improving the functioning of its insurance markets and providing relief to insureds that have until recently faced steadily increasing premiums and contracting coverage terms. Supporting a growing captive insurance industry would provide Florida insureds with another option to protect their properties and businesses where coverage from the traditional insurance market is either unavailable or unaffordable.
As discussed above, Florida has many natural advantages and its geographic location makes it the perfect destination for captive insurance companies and their boards of directors looking for a warmer, or more accessible, or more familiar, home than some of the more established domiciles, such as Vermont and the Caribbean Islands.
As the sun shines down on Florida, a sleeping giant is waking up. When it does, it might change the captive insurance industry for ever.
Ben Stearns is an attorney based in the Tallahassee office of the law firm of Carlton Fields, P.A. He is a founding member and the current secretary of the Florida Captive Insurance Association.
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