Randy Sadler
2 August 2023ArticleAnalysis

Business in the crosshairs: address political dynamics in the US with captive insurance

In the ever-evolving landscape of politics, businesses are finding themselves navigating treacherous waters. Now more than ever, the US faces a unique political risk landscape, where uncertainties and rapid shifts in policies can leave even the most established businesses vulnerable to unforeseen challenges. To survive and thrive in this dynamic environment, businesses, and their captive insurance managers, must be prepared, vigilant and proactive in addressing political risks head-on.

This article will delve into the key reasons why US businesses must actively address political risks right now and explore how captive insurance, combined with proactive risk management practices, can protect their operations, mitigate potential damage and help them stay resilient in an uncertain political landscape.

Current political risks

The changing political landscape translates to a range of challenges that can impact industries and organisations in various ways. From regulatory changes to trade policies and public sentiment, businesses need to be aware of these risks and implement effective strategies to mitigate their potential impact. By understanding these key political risks, businesses can navigate through uncertainty and proactively position themselves for success.

Political instability

Political instability in the US can be disruptive for businesses operating here. It creates uncertainty, making it difficult to plan for the long term and make important investment decisions. When there’s policy gridlock, leadership changes or social unrest, it throws a wrench into business operations, causing regulatory uncertainty that undermines consumer confidence. It can even mess with the markets too, affecting interest and exchange rates. All this can make it tricky for businesses to run smoothly and remain profitable.

During periods of civil unrest, tensions and emotions can run high, potentially creating a volatile environment where confrontations and conflicts may occur.

One example of civil unrest that led to gun violence and impacted businesses is the protests and riots in Minneapolis, Minnesota, following the killing of George Floyd in May 2020. During the unrest, some businesses were looted, vandalised and set on fire. The Midtown Global Market, a multi-ethnic marketplace in Minneapolis, suffered significant damage and looting during the unrest, leading to financial losses and disruptions in operations.

The violence and destruction caused by the civil unrest also affected neighbouring businesses that experienced a decline in customers and foot traffic due to safety concerns and temporary closures.

Instances like these highlight how civil unrest, combined with the presence of firearms and heightened tensions, can result in violence that directly impacts businesses.

Regulatory changes

Changes in US politics have a big impact on regulations that affect domestic businesses. When political leaders change, they often have different views on government rules. This can lead to changes in existing regulations or new ones being made. Political pressures, public opinion and international agreements and trade policies can affect regulations. All this can directly impact businesses by changing the rules they have to follow and affecting how competitive they are in the market.

For example, community banks in the US were affected by politically-driven regulatory change through the Dodd-Frank Act. Although it was aimed at larger institutions, community banks faced increased compliance burdens and costs. They had to allocate more resources to meet capital and lending standards, diverting resources from core operations. This made it harder for them to compete and serve their communities effectively, impacting their ability to support local businesses and economic growth.

Legislative actions

Legislative actions in the US can negatively impact businesses in several ways. New laws and regulations can lead to increased compliance costs, operational disruptions, reduced competitiveness, market uncertainties, compliance complexity and opportunity costs. These challenges can strain resources, disrupt operations and hinder growth.

Sometimes legislative actions can have positive as well as negative consequences. For example, the implementation of the Affordable Care Act (ACA) has enabled 20 million Americans who would otherwise have been uninsured to receive healthcare coverage, according to the Department of Health and Human Services.

The ACA introduced significant changes to the healthcare system, including employer mandates for providing healthcare coverage. The new requirements placed financial burdens on some businesses, particularly smaller ones, who had to navigate complex regulations, adjust their budgets and allocate resources to comply with the law. For some businesses, these increased costs and administrative burdens resulted in difficulty maintaining profitability.

The ACA aimed to improve healthcare access, but its implementation had unintended consequences for certain businesses, highlighting how legislative actions can have adverse effects on specific industries or sectors.

Taxation issues

When politicians make decisions about taxes, it can mean businesses have to deal with different tax rates, deductions or rules for international taxes. These changes can directly affect a business’s finances, such as how much money it makes, where it invests and how much cash it has. It can also create uncertainty and make businesses adjust their financial plans and strategies.

One example of how a politically-related taxation change negatively impacted businesses in the US is the reduction in the corporate tax rate enacted through the Tax Cuts and Jobs Act (TCJA) of 2017. While the reduction in the corporate tax rate was intended to stimulate economic growth, some businesses faced adverse consequences.

For example, the TCJA reduced or eliminated certain tax credits and incentives that were crucial for renewable energy companies. This change undermined the financial viability of renewable energy projects, making it more challenging for these companies to attract investors and hindered their growth and expansion.

Cybersecurity and data privacy

Political decisions and regulatory actions can shape the landscape of cybersecurity and data privacy requirements, creating obligations and compliance standards for businesses to follow. Changes in laws or regulations related to data protection, breach notification or cross-border data transfers can introduce new challenges and burdens for businesses. Failure to meet these requirements can result in legal consequences, reputational damage and loss of customer trust.

The California Consumer Privacy Act (CCPA) is an example of a cybersecurity measure that impacted businesses. This state-level law grants to California residents rights over their personal information and imposes obligations on businesses. Companies operating in California or handling California residents’ data must comply with transparency requirements, obtain consent, honour data access and deletion requests and implement data security measures.

Adapting to the CCPA’s requirements can be challenging, requiring businesses to update policies, invest in technology and adjust data management practices to ensure compliance and protect consumer privacy. Although a positive measure, the CCPA led to initial costs of implementing compliance measures, and maintaining robust cybersecurity infrastructure can place a financial burden on businesses, particularly for smaller enterprises with limited resources.

Public perception and consumer activism

Many consumers in the US truly care about a company’s values and how they contribute to society when deciding what to buy. That’s why businesses must pay attention to public opinion and work to address social concerns. It affects brand reputation, what consumers choose to buy and how businesses engage with the public.

A negative view or controversy around a company can significantly damage its reputation and sales. On the flipside, businesses that align with positive values and respond to consumer concerns can build a solid brand and attract loyal customers.

One example of a company that found itself in the crosshairs of consumers is clothing company H&M. In 2018, H&M faced backlash and a decline in sales following a controversial advertisement that was perceived as racially insensitive. The public response on social media was widespread, leading to boycotts, protests and public criticism. The negative public perceptions resulted in reputational damage and financial consequences, highlighting how it can impact a business’s bottom line and long-term success.

How to approach political risk

Ensuring that leaders understand the risks to their businesses is crucial, including existing risks as well as those on the political horizon. To effectively mitigate these risks, several key steps should be taken.

First, it’s essential to stay well-informed about the political landscape by monitoring political developments, policy changes and regulatory updates at the local, state and federal levels. This information enables businesses to anticipate and adapt to potential challenges. Developing processes to track and analyse political risks that may impact the business is another important step.

Regularly conducting comprehensive risk assessments tailored to the specific business, its industry and operations, helps identify potential political risks that need to be addressed.

Second, a business can benefit from evaluating the potential impact of political events or policy changes on crucial aspects such as finances, operations, supply chains, and reputation. This evaluation enables businesses to develop proactive strategies and contingency plans. To reduce dependence on a single geographic location, diversifying operations and supply chains is highly recommended. By doing so, businesses can minimise the risks associated with regional political instability or disruptions.

Active involvement in organisations or political groups within the industry can be beneficial in stabilising the business. This participation not only unites businesses with others in the industry but also provides policymakers with a better understanding of relevant perspectives and needs.

Alongside these preventive measures, fostering relationships with key stakeholders and cultivating open lines of communication is essential. Such efforts bridge the gap between building a strong network and the potential negative consequences of isolation.

Flexibility must be an inherent element of the business plan. Adaptable strategies and operations enable businesses to respond effectively to political changes and navigate uncertainty.

Finally, there is insurance. While traditional insurance policies often have exclusions or limitations that do not adequately cover the unique and complex nature of political risks faced by businesses, a captive insurance company is capable of filling gaps.

A unique role

“Captive insurance ensures a business has comprehensive coverage for a wide range of political risks.” Randy Sadler, CIC Services

By designing policies that encompass risks associated with political instability, regulatory changes, legislative actions, taxation, cybersecurity and public perception, captive insurance ensures a business has comprehensive coverage for a wide range of political risks.

In addition to addressing current political risks, a captive insurance company provides customised coverage and risk management solutions tailored to the client’s specific political risk exposures—whether unrest, regulations, legislature or tariffs.

For example, we had a client who was a physician operating a radiology practice. A major task within the business involved reading charts. It varied state by state, but the business faced the risk of having the law changed so that every chart would need to be reviewed by not one physician, but two.

Although the law is clearly meant to provide important safeguards, it imposes a significant labour change that would drastically impact the business’s cost model. Had that happened, its captive insurance could cover losses associated with the increased labour to provide the practice with time to develop strategies to recover the increased costs.

In the above example of the ACA, a healthcare broker client would be dramatically impacted by this law, as it makes what it sells obsolete in some cases. A captive insurance company could provide an on-time payout for lost revenue while providing time to pivot the business to alternative pursuits.

There are numerous such examples of the protections a captive can offer. Any time a business has a government contract and a new administration is elected, there’s the risk of losing that contract, or a business could be hit with changes in Environmental Protection Agency regulations.

When a business includes international factors outside the US, there are further repercussions. A client of ours is a specialty product seller importing goods from China. Changes in tariffs directly impact its bottom line and ability to thrive. This client had a captive insurance company, so when tariffs increased, the captive covered the costs for one year while it found an alternative supplier.

With the guidance of professionals working for a captive insurance management company, clients can assess and identify their political risks, design insurance programmes that encompass these risks and establish proactive strategies to mitigate and manage them. The experts at the captive insurance management company can offer valuable insights, conduct risk assessments, assist in policy development, and provide ongoing monitoring and support to ensure the client’s captive insurance company effectively addresses political risk throughout its operations.

Navigating the current political landscape in the US presents challenges and opportunities for businesses. With political risks on the horizon, it’s crucial to proactively understand and mitigate these potential threats. By implementing risk mitigation strategies and leveraging their captive insurance company, businesses can position themselves for long-term success and enhanced resilience in an ever-evolving political landscape. Proactive risk management is the key to safeguarding businesses and capitalising on emerging opportunities in today’s dynamic political environment.

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

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