AT ISSUE: NJDOBI and Businesses’ Use of Captives, Reinsurance

When Applied Underwriters filed a petition against the New Jersey Department of Banking and Insurance (NJDOBI) on March 5th, the company placed the ability for businesses in the state to choose captives for risk retention squarely on the table. At its core, the issue is about the limiting of choices available to New Jersey business owners to provide for their companies’ statutorily required workers’ compensation coverage in full compliance and in a manner that is both dollar-wise for them and beneficial to the safety and care of their employees.

The essence of the NJ DOBI’s position is that, should a business retain risk, which by definition changes the ultimate cost of risk for that business, any retention vehicle will have, in effect, changed the rating of the policy in violation of the state’s right to review and approve insurance policy rates and forms. The target, specifically, was a program named EquityComp delivered by Applied from 2008 to 2016 to the general satisfaction of businesses and their professional insurance agents in the state.

The essence of the conflict here lies in the Department’s disregard of the use of captive reinsurance; that is, the NJDOBI would forbid the use of a captive to retain risk. That’s it in a nutshell, as we see it. The Department is holding that it has extraterritorial jurisdiction over any reinsurance transaction that follows a New Jersey policy.

We hold that the Department has a fair point, albeit a relatively small one: there is the need for oversight of policy rates and forms, for sure, but we feel that as long as a New Jersey workers’ compensation policy remains in full compliance and is fully insured by the financial strength of an admitted insurer, business owners should be free to retain any amount of risk they desire through subsequent reinsurance.

The Department’s position seems to counter a long-standing practice and a growing trend. Rewind back to 2012 when the New Jersey Compensation Insurance Rating Bureau—a separate body from the NJDOBI that is responsible for workers’ compensation rates and forms—reviewed and permitted the EquityComp program’s structure and then followed up over the years periodically affirming its views…and the NJDOBI position seems out of synch with the realities of the review process and, most importantly, with the desires of business owners seeking cost-wise solutions through an insurance provider renowned for its care of injured workers—an important characteristic of Applied Underwriters according to independent sources.

The broader question for insurers and businesses is this: will New Jersey prove to be hostile or unduly challenging for captive insurance, an increasingly preferred mechanism for risk retention? According to NAIC stats, captive insurance now commands more than $81 billion of the nation’s insurance dollars and is a growing sector, making a discouraging approach seem faulty for a state whose leaders have targeted economic growth.

What appears to be a matter of rates, filings and the like may now appear to the industry to be a broader indicator of the NJDOBI’s philosophical approach to business encouragement and accommodation in the Garden State, not to mention a specific referendum on its approach to accommodating captives.

Applied may be the test case to the NJDOBI, but there is no winner for sure if ultimately consumers are penalized, that is, the business owners, injured employees and the tax-paying public, whose costs are affected by businesses statutory costs and by a drop in the rather substantial taxes captive entities contribute to the state.

We hope that this matter is worked out amicably and that captives will wind their way up and down and on and off the Garden State Parkway profitably, observantly and smoothly—within a reasonably enforced speed limit. SA