On February 22, 2011, New Jersey joined approximately two dozen other states in authorizing the creation of captive insurance companies. (P.L.2011, c.25) Vermont has long dominated the market for domestically domiciled captive insurers, but now half the states have passed legislation hoping to attract captives and the jobs and revenue that come with them.

A captive, broadly speaking is a privately held insurance company that typically provides insurance only to its parent company and related corporate entities (not the public). Captive insurers may also be used by trade associations and industry groups to provide insurance for their members. Use of a captive may offer advantages to large companies or groups of companies that generate a substantial amount of risk and seek to manage insurance costs and control claims; it may also provide certain tax benefits. See, e.g., Gary Wilcox and Adam Budesheim, Tax Considerations in Forming a Captive Insurance Company: The Deductibility of Premiums, LexisNexis Emerging Issues Analysis (Oct. 2009).

The cost of insuring risk through a captive insurer is generally less than the cost of insuring the same risk through a traditional insurer. That is because the hazards underwritten are not those of a pool of policyholders, but rather those specific to an entity. Captives can also be useful when coverage for certain kinds of risks is unavailable or prohibitively expensive and they can provide more direct access to the reinsurance markets.

Under the new legislation, a captive insurer is permitted to apply to the Commissioner of the New Jersey Department of Banking and Insurance for a license to do business in any of several lines of insurance, including life, health, property and casualty, fidelity, and title insurance. A captive also can provide workers' compensation insurance, but only to its parent and affiliated companies and only to the extent permitted by other laws. A captive insurer is not permitted to provide private passenger automobile or homeowner's insurance policies. A captive may, however, provide reinsurance on risks ceded by any other insurer, subject to certain statutory conditions.

To write insurance in New Jersey, the captive must: (1) be licensed in the State; (2) hold at least one meeting of its board of directors or other management committee per year; (3) maintain its principal place of business in the State; and (4) appoint a registered agent to accept service of process in the State. A captive insurer is required to maintain unimpaired capital of statutorily prescribed amounts and to pay state taxes as provided for in the new legislation (but captives are exempt from all other state taxes). A captive also must make certain disclosures to the Department of Banking and Insurance, including information on its organizational structure, financial condition, coverage limits and rates, and any other information the Department may reasonably request. Information about the captive's financial condition will be reported and updated to the Department on a yearly basis. The captive also is subject to auditing and inspection at least once every three years.