An insurance plan firms find captivating [NJBIZ (NJ)]

Self-insured companies attract well-paid jobs to N.J.

When New Jersey first allowed companies to form captive insurance companies two years ago, BASF took note.

The global chemicals giant already had its captive based in Vermont, which has allowed companies to form their own self-insurance vehicles for more than 20 years. But when New Jersey opened the floodgates, BASF moved those operations here, bringing with them the kinds of educated, well-paid jobs the state likes to attract.

"What Vermont clearly saw, and which New Jersey will be getting, is a lot of the ancillary services that go with running a captive - actuarial, banking, investment services," said Leslie A. Fowler, director of insurance for BASF, in Florham Park. "Vermont has built up quite a reputation, and we're hoping to see New Jersey do something similar."

In the two years since legislation enabled companies to form their own captive insurance companies - a kind of self-insurance vehicle for covering in-house risks - New Jersey has licensed 10 captives, with more than a dozen in the pipeline. And, experts say, the launch of more captives will create a new branch of the insurance industry here.

Attorney Harry Baumgartner, of the law firm Bressler, Amery & Ross, which advises captives, said self insurance sustains "an industry of service providers that is good for the economy. There is no reason why New Jersey can't be a top 10 captive jurisdiction over time, given the concentration of companies here."

Among the companies that have formed or relocated captives here: Prudential Financial, Verizon and QualCare.

At a discussion last month, Baumgartner said the captive industry will attract attorneys, actuaries, insurance services firms, bankers and investment advisers.

According to the state Labor Department, employment in the state's insurance sector rose by 1,100 jobs in the third quarter of 2012 compared to the prior year, to 69,673, while at the national level, employment in the industry fell 1.4 percent.

Sheila Small, former assistant treasurer of Verizon and the new executive director of the New Jersey Captive Insurance Association, said creating a captive helps control risks and cost.

"Why (deal) with an outside insurance company that wants administrative fees and profits when you can do a lot of it in house?" Small said.

Her association was formed in 2009 to build support for the captive insurance legislation signed by Gov. Chris Christie in 2011.

"You have to run your captive like you would run a real insurance company - you have to have surplus to handle claims," Small said. But because the captive is a form of self insurance, "if the company has a (lower) loss experience, that money didn't go out the door - it stays within the company."

John Talley, assistant chief of captive insurance at the state Department of Banking and Insurance, said captives benefit companies because they essentially pay insurance premiums to themselves, rather than to an outside insurance company, and there are federal tax advantages. In addition to large corporations that have traditionally gone the captive route, "we're also getting medium-level companies to think about this," Talley said.

That's a boost to the state coffers, also.

New Jersey collects a tax as a percentage of the premiums that corporations pay to their captives - anywhere from $7,500 to $200,000 in taxes a year. According to the state Treasury, New Jersey has 10 captives and collected a total of $628,666 in premium taxes in 2012 and 2013; the state estimates between five and 10 additional companies will file captive applications in the second half of 2013.

The captive basics

WHAT: A captive is an insurance company that's owned and controlled by the company that creates it. The company uses the captive to self-insure its risks instead of paying premiums to an insurance company. Captives cover a variety of risks, from property/casualty to workers' compensation and terrorism.

WHO: Most large corporations have their own captives. A good rule of thumb: If you're paying $1 million or more in insurance premiums, it can be more economical to self-ensure through a captive.

WHY: Many corporations already self-insure a portion of their risks exposure, since the cost of buying enough insurance is prohibitive, so a captive is a vehicle for getting favorable tax treatment for the money put aside to cover future claims.

HOW: The captive can still deal with the corporation's insurance company, but in a different way. For example, if its insurance policy has a $1 million deductible, the corporation can create a captive that issues a $1 million reimbursement policy to its own company to cover the deductible. -Beth Fitzgerald

E-mail to: beth@njbiz.com

On Twitter: @bethfitzgerald8