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30 October 2024ArticleAnalysis

Battling inflation’s blows: how businesses can stay resilient with captive insurance

Randy Sadler of CIC Services provides a guide to the captive insurance options available for companies worried about inflation.

Inflation, once a periodic worry, has become a persistent adversary for businesses across the globe. Despite some cooling, inflation remains elevated, well above the Federal Reserve’s target of 2 percent, with experts such as J.P. Morgan forecasting core inflation to stick at around 3 percent in 2024. 

While the shockwaves of inflation reverberate across sectors, certain industries, such as restaurants and retail, are being squeezed more tightly than ever. With input costs skyrocketing, wages rising and unpredictable supply chain disruptions, the question is: how can businesses safeguard themselves from the worst fallout of inflation?

The answer may lie in a lesser-discussed but highly effective solution—captive insurance.

Inflation’s hidden threats: the fallout you can’t ignore

For businesses, inflation doesn’t just mean higher prices—it triggers a series of cascading challenges that can be devastating. You can’t directly insure against inflation (there’s no singular triggering event), but you can certainly prepare for and protect against the turmoil it creates. Here’s where businesses feel the pinch.

Soaring costs of goods and services: As prices for raw materials and essential goods climb, businesses are forced to either absorb the costs or hike prices. This is a tightrope walk, especially for industries with razor-thin margins, such as restaurants and retail. The pressure to maintain profitability is immense.

Escalating labour costs: Inflation pushes wages higher, straining businesses that are already grappling with tight labour markets. The challenge becomes even greater when paired with rising benefits costs, leaving companies struggling to balance operational expenses with employee satisfaction.

Supply chain chaos: Global supply chains are still feeling the aftershocks of the COVID-19 pandemic, and inflation only makes it worse. Price spikes, delays, and shortages can disrupt entire operations, creating financial strain that’s hard to absorb.

Consumer behaviour shift: As inflation erodes consumer purchasing power, discretionary spending slows down. This shift in demand can be crippling for businesses that rely on steady consumer traffic, leading to revenue shortfalls that are difficult to recover from.

Energy and commodity volatility: In inflationary times, the costs of energy and essential commodities fluctuate wildly. For sectors that rely heavily on these inputs—such as manufacturing and logistics—this volatility adds another layer of financial uncertainty.

Rising interest rates and debt: Higher inflation often leads to increased interest rates, driving up borrowing costs for businesses. For those already struggling with tight margins, this can severely limit opportunities for growth and expansion.

“Captive insurance offers protection against revenue losses triggered by inflation-induced changes in consumer behaviour.”

Captive insurance: the game-changing strategy

While inflation wreaks havoc on businesses, captive insurance presents a smart, strategic way to weather the storm. Captive insurance doesn’t just fill in the gaps left by traditional policies—it offers a tailored approach to insuring against the indirect effects of inflation, providing businesses with a financial safety net.

Here’s how captive insurance can step in to mitigate the risks inflation creates:

Shielding against supply chain disruptions: Inflation can result in unpredictable price hikes or delays from key suppliers. A captive insurance company can insure your business against these disruptions, providing capital to cover cost spikes or shortages. With captive insurance, companies can maintain steady operations even when their supply chain falters.

Cushioning rising labour costs: As wages climb during inflationary periods, a captive can help by providing wage indemnity coverage. This means that businesses can offset labour cost increases without taking a hit to their financial stability. It’s a way to ensure your workforce remains intact without burning through your budget.

Safeguarding revenue during consumer downturns: Captive insurance offers protection against revenue losses triggered by inflation-induced changes in consumer behaviour. If a business faces reduced demand due to shrinking consumer spending power, a captive can help bridge the gap and maintain cash flow. This is especially crucial for businesses reliant on discretionary spending.

Insuring against energy and commodity price spikes: Volatile energy and raw material prices can wreak havoc on industries like manufacturing, where costs can fluctuate daily. A captive can offer specialised coverage that protects against these price swings, giving companies the stability they need to manage operations confidently.

Breaking free from traditional insurance constraints: Traditional insurance policies tend to become more expensive in inflationary periods, further squeezing businesses. Captive insurance allows companies to self-insure certain risks, giving them greater control over their costs and coverage. This offers long-term savings and provides a tailored solution to inflation’s many challenges.

Custom-tailored coverage to control risks: The beauty of a captive insurance company is its flexibility. Unlike conventional insurance, which may not cover inflation’s unique risks, a captive allows businesses to build policies specifically designed for their needs. This ensures that companies have a robust defence against the indirect consequences of inflation without relying solely on volatile external markets.

A real-world example

Consider the case of a major restaurant chain that was hit hard by rising food costs, higher wages, and declining consumer spending during the latest inflationary surge. Rather than surrendering to the pressures, they established a captive insurance company to protect themselves against these threats.

● They used the captive to cover the increasing cost of key ingredients, ensuring that food price spikes didn’t eat away at their profitability.

● They insured against revenue shortfalls resulting from decreased consumer traffic, allowing them to maintain stability during tough economic times.

● Their captive provided protection from supply chain disruptions, allowing the chain to continue serving customers without experiencing catastrophic delays.

By proactively leveraging captive insurance, the restaurant chain protected itself from inflation’s fallout and emerged in a stronger position, better equipped to navigate future economic uncertainty.

Why businesses should act now

With inflation predicted to linger into 2025 and beyond according to economists, businesses that wait to address these risks may find themselves caught off-guard. Captive insurance offers a powerful tool to stay ahead of the curve, allowing companies to protect themselves against inflation’s ripple effects while maintaining control over their risk management strategies.

Now is the time for business leaders to assess their vulnerabilities, explore the benefits of captive insurance, and act decisively. By doing so, they can face the future with confidence, knowing they are prepared for whatever inflation throws their way.

Randy Sadler is a principal with CIC Services. He can be contacted at: randy@cicservicesllc.com

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