Key Considerations for Business Lawyers: Captive Insurance in Today’s Insurance Market
In today’s challenging insurance market, small businesses in Florida are facing rising premium rates and reduced coverage, leaving them vulnerable to unexpected losses. However, there is a little-known solution that could be a game-changer for these businesses: captive insurance. Captive insurance companies, or captives, are owned by corporate affiliates or subsidiaries and provide coverage for the risks of their parent and related entities.
While captives have traditionally been more common among large corporations, they are highly underutilized by smaller and middle-market businesses, especially in Florida due to restrictive legislation and high premium tax rates. Captives can help plug gaps in the commercial insurance market, improve the claims process, access reinsurance markets, and provide tax benefits for businesses.
One key aspect of captives is their compliance with Section 831(b) of the US Tax Code, which allows them to be taxed at the long-term capital gains rate on premium income. This tax advantage, coupled with the risk management benefits of captives, makes them an attractive option for businesses looking to protect themselves from unforeseen losses.
Despite the benefits of captives, the IRS has scrutinized them for potential tax avoidance schemes, leading to increased regulation and oversight. It is crucial for businesses considering captives to ensure they meet operational standards and adhere to insurance industry norms to avoid penalties and disallowance of premium deductions.
To navigate the complexities of captive insurance, businesses are advised to work with experienced captive managers who can help establish and manage captives for risk management purposes. By understanding the benefits and risks of captives, businesses can make informed decisions to protect themselves in today’s challenging insurance market.
As the landscape of captive insurance continues to evolve, it is essential for businesses and their legal counsel to stay informed about the latest developments and regulations in order to make the most of this valuable risk management tool.
