By Van Carlson, Founder and CEO of SRA 831(b) Admin
The Hardening of an Insurance Market: Then and Now
The insurance market operates in cycles, influenced by a myriad of factors. In a Soft market, premiums align closely with claims, leading to increased profits and competitive rates for insurers. Conversely, a Hard market arises due to external challenges such as economic instability, political uncertainty, and poor investment returns.
Historically, the US experienced a notorious Hard market from 1984 to 1987. Liability premiums skyrocketed, in some cases by up to 250%, due to factors like lenient underwriting and massive litigation settlements, notably those related to asbestos. This crisis sparked allegations of insurer collusion and was highlighted by Time magazine’s March 1986 cover: “Sorry America, Your Insurance Has Been Canceled”. In response, Congress acted in 1986, capping liability premium increases and advocating for self-insurance, an idea first introduced by General Motors in 1915.
Fast forward to today, and we find ourselves in another Hard market, which began in 2021. Unlike the typical three-year cycle, this market shows no signs of relenting. Contributing factors include:
- Severe weather events leading to significant property damage.
- Diminished returns on investments due to low-interest rates.
- Escalating litigation costs associated with digital threats, such as data breaches.
- The unexpected repercussions of the COVID-19 pandemic, which led to the downfall of giants like JC Penney and Virgin Atlantic.
- In 2022, weather-related losses amounted to $99 billion, and by Q1 2023, the Property and Casualty industry reported $8.2 billion in net underwriting losses.
- Ongoing supply chain disruptions, intensified by geopolitical tensions and events like the prolonged conflict in Ukraine.
- Inflation, at its highest in four decades, is pushing underwriters to increase premiums to strengthen reserves.
These challenges, among others, are driving up the costs of business insurance premiums.
A Tax Code For Self-Insurance
The silver lining is that history has taught us valuable lessons. During the market hardening of the 1980s, Congress introduced the Tax Reform Act of 1986, which empowered business owners. The 831(b) Tax Code permits businesses to create and fund an 831(b) Plan, also known as a micro captive insurance company. Contributions to the 831(b) Plan are tax-deferred and can be utilized to self-insure against underinsured or uninsured risks.
This tax code encourages business owners to establish a “rainy day” fund, which can be tapped into for specific risks that might jeopardize their operations.
What is Covered?
An adaptable 831(b) Plan can offer business coverage(s) when insurance providers demand exorbitant premiums or are reluctant to underwrite unique risks such as:
- Dispute resolution
- Data breaches, including ransomware, phishing, malware, and more
- Supply chain disruptions
- Accounts receivable defaults
- Deductible reimbursement
- Subcontractor defaults
- Warranty claims or government-mandated product recalls
- Political instability, both domestically and internationally
- Specialized coverages tailored for specific industries
Rather than feeling beholden to insurance carriers, 831(b) plan owners can craft coverage types and limits that address their unique risks, all while retaining commercial insurance for more conventional risks.
Protecting Success Through an 831(b)
Forward-thinking businesses should consider establishing an 831(b) Plan as a safeguard for low-frequency, high-severity risks. When such a risk materializes, and it’s likely it will, these proactive businesses won’t find themselves cornered or, even worse, forced to shut down.
831(b) Plans have proven their worth over time. So, why aren’t more business owners aware of them? Designing, implementing, and managing these plans necessitate administrative experts who can delineate the coverages, oversee the claims process, and ensure IRS compliance. Much like a 401k requires an administrator, so does an 831(b) Plan. The seasoned team at SRA 831(b) Admin boasts over 100 years of collective experience in establishing and overseeing 831(b) Plans.
Van Carlson is the Founder & CEO at SRA 831(b) Admin. He is an industry leader in enterprise risk management solutions with over 25 years of experience. Along with the responsibility of bringing SRA’s new products to market, he helps clients achieve their financial goals and aid in protecting a business’s assets through times of uncertainty. Of SRA’s many products, the company is most known for plans that aid mid-market businesses in mitigating risks more effectively. Van began his career with Farmers Insurance Group as an agent, where he saw firsthand the benefit of how 831(b) plans can assist small to mid-size businesses. Van is a veteran of the U.S. Coast Guard.