Christie Liberates Captives

By Gregory V. Serio

New Jersey Governor Chris Christie’s recent enactment of legislation into law allowing for the creation of captive insurance companies in the Garden State has not only created a new economic opportunity there but also has brought about a moment of reckoning for his neighbors to the East. New York, once counted as one of the few states to have a captive statute, must now decide if it really wants to be in the captive business at all and, if so, must decide what it plans to do to reverse a marked decline in interest in the Empire State as a captive domicile.

In light of the fast-paced changes occurring in the alternative risk market in the United States, New York may not have much time to ponder its options. As most insurance professionals know, captives are insurance companies owned by businesses that seek to insure their own risks. There are risk management, financial, and tax benefits to operating captive insurance companies, as well as providing autonomy to business and non-profit executives in terms of the construct and financing of insurance programs. Even mainline insurance companies, who once saw captives as their sworn enemies, have come to understand how captive insurance companies provide a positive element to the overall insurance marketplace. In fact, many traditional carriers now operate their own or cooperate closely with captive insurers, including the providing of reinsurance for these facilities. The problem for New York is not that it lacks a captive law, as has been the case of many states coming late to the captive market. Since 1997, the state has had a law authorizing certain types of captive insurers. In fact, many in the market were surprised to find that New York not only had an interest in captives, but was capable and eager to join the ranks of on-shore captive domiciles. After intense legislative wrangling over the Insurance Department’s captive initiative, Article 70 of the insurance law was enacted through an addition to the 1997 state budget bill. It may have been an inauspicious start for New York’s captive foray, but it set the state on a rather unusual course given its predilection for strict regulatory oversight of the insurance market.

New York’s initial law was not designed to compete with the granddaddy of domestic United States captive venues, Vermont, but was focused more upon its homegrown captive opportunities: blue chip corporations that had sought captive opportunities elsewhere and government entities which were quickly realizing that captives and alternative risk transfer mechanisms made for good public policy and public finance. A statutory net revenue or net worth threshold of $ 100 million was the primary nexus to this objective, and the state’s well-known public authority, the Metropolitan Transportation Authority was the only government entity enabled to avail itself of captive opportunities (and which it has done with considerable success). Notwithstanding these strictures imposed through the deliberative process, and some early regulatory missteps that were remedied with the assistance of some sage advice from the market, New York quickly grew to more than 40 captives with the value of its insured risk or premium outpacing many other state captive domiciles with the exception of Vermont.

The problem for New York today is that the state’s captive law is both outdated and has been largely neglected over the past several years. There seemed to have been abject disinterest on the part of the Spitzer/Paterson administrations, with the exception of some efforts of Superintendent James Wrynn to mobilize the Insurance Department in a variety of economic development directions, including a re-energizing of the old New York Insurance Exchange. Captives were not seen as a priority by the Insurance Department, the New York Tax Department seemed to seize the day on a number of tax issues that proved to be disastrous for any efforts to domesticate captives in the State, and other states spent the last decade updating their captive laws. This has prevented New York from keeping pace with the ever-changing developments in this field. The licensing of new captive insurance companies, which grew steadily from 2000 to 2005, has come to a virtual halt. New York has essentially put out a “not open for business” sign—or at least a message—to all insurance professionals and business leaders who would like to have their captives located in New York. Instead, they continue to send their business to Vermont, Washington, DC and, soon enough, New Jersey.

The state’s indifference to the captive law is inexplicable. Whereas once the state had an open mind and open door to captive creation, it has mired those captives still here in bureaucracy and has neglected any opportunity to invite others to set up shop in New York. A clean industry that brings new tax dollars to a state and provides employment opportunities has been ignored by regulators and economic development officials. Further, efforts to modernize the state’s captive statutes has been met with resistance: a 2005 effort by the Pataki administration was unsuccessful in the Legislature, and a 2008 Governor’s Bill by Governor Spitzer was so flawed as to make its failure to pass something of a mixed blessing.

This is not the first time that a state has taken advantage of something dying on the vine in another, neighboring state. And it certainly is not the first time New York and New Jersey has played a bit of “stick in the eye” in financial services. It was not all that long ago that Jersey City was poised to become a new financial center, and Goldman Sachs’s gleaming tower on the west side of the Hudson River is an endearing symbol of the confidence that once gave Jersey City such swagger. The passing of a captive law in New Jersey is more than just a recognition of the benefits of a healthy captive industry; it is also a pronouncement that New Jersey is prepared to service New York corporate interests in building and managing captive insurance entities, and the sheer proximity of New Jersey’s corporate centers to New York and their shared media markets should both be deeply troubling to New York. It can be expected that erstwhile New Jersey insurance professionals and state officials will find Manhattan and most other parts of New York to be targetrich environments. Worse still, captives still resident in New York may find it too attractive in New Jersey to resist re-domesticating to the Garden State.

A review of New Jersey’s new captive law leaves one believing that the competition between the two domiciles is all-tooreal and the Garden State’s legislators intended to throw the gauntlet at the feet of New York: New Jersey provides a tax rate that is a shade below New York—0.38% for the first $ 20 million of premium and 0.28% for the next $ 20 million versus 0.40% and 0.30%, respectively; New Jersey allows association captive plans while New York does not; New Jersey does not provide for a financial threshold for captive sponsors while New York, as noted, has a $100 million net worth/net revenue benchmark; and, perhaps most interesting, New Jersey provides for licensing of “branch offices” of other states’ domestic captives, something never considered by New York. Perhaps not so surprising, many of the provisions in New York’s captive law that are uncompetitive in relation to New Jersey’s new law and the laws in many other states were addressed in an aggressive way in the 2005 initiative offered by the Pataki administration and sponsored by the Insurance Committee chairs in the state legislature. However, in one respect, New York does not have to necessarily pass new legislation for captives if it asserts a recommitment to the concept of captives in New York and addresses it to the original target audience: the large corporations and government entities that call New York home. The Insurance Department would be first-stop on this drive, with the re-energizing of its captive bureau and a return of the marketing of New York as a strong captive supporter.

To be sure, a new, modern captive statute would be ideal for re-positioning New York in the current captive world; however, any new initiative has to come with a broader commitment from the highest level of government that captives are to be an important part of New York’s economic fabric and a keystone of its insurance market. The Cuomo administration made a significant move to modernize insurance regulation with its pursuit of the new Department of Financial Services in this year’s budget legislation comprising the Insurance and Banking departments, and would make it a tandem accomplishment to pursue a dramatic liberalization of the captive law to not only keep pace with New Jersey but eclipse it altogether this year as well. But it also needs to stop the internecine warfare between insurance policy and tax policy, the latter of which has almost singularly made New York inhospitable to new captive development.

New Jersey may have done New York a favor by being so direct in its assault on the latter’s moribund captive program. It has provided a wake-up call to the Empire State that if it intends to be a new New York, as Governor Cuomo has made the cornerstone of his campaign to reverse the state’s fortunes, it needs to take dramatic action. Reforming the approach to captive regulation and captive public policy is one way that New York can regain the insurance market’s attention to its efforts to grow a vibrant captive marketplace. [