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In an era of escalating challenges, businesses across the country are grappling with forces that are often beyond their control.
Large-scale challenges, like the wildfires devastating Los Angeles communities and threatening billions of dollars in damages, can disrupt, if not destroy businesses as well as communities. Meanwhile, smaller-scale, but equally stark, disruptions can have just as severe an impact at the individual level. Consider the winter storms in Wichita, Kansas, that forced businesses to close their doors – some, perhaps, forever. At the regulatory level, shifts like the FDA’s Red 3 ban – with the new administration considering other major policy adjustments – add another layer of disruption, this time for the food and beverage industry.
In the face of uncertainties, financial advisors are uniquely positioned to help their clients prepare for the unexpected. By leveraging innovative risk management solutions, advisors can help businesses gain the stability they need to weather today’s disruptions and build resilience for the future.
Risk is being redefined for businesses
In California, a perfect storm of risk has been brewing for decades. As wildfire damage and subsequent claims surged, insurers began to reconsider their operations in the state. Rising replacement costs, inflation, and the challenges of California’s Proposition 103, which delays rate increases, made it difficult for insurers to stay profitable.
By 2023, State Farm ceased accepting new fire insurance applications in California, citing financial pressures and outdated state regulations. Allstate, Farmers, Travellers, and others have also scaled back coverage in the state. As a result, many businesses are left struggling with limited or no coverage – just as one of the most devastating natural disasters in recent memory hit the state.
The unfortunate truth is that many pressing threats aren’t covered by traditional insurance policies. For example, business interruption insurance often excludes large-scale disruptions (for instance, a global pandemic). Cyber attacks, a growing and difficult-to-quantify risk, are often excluded from coverage. Reputation damage is another overlooked risk in today’s hyper-connected world, where online scrutiny and viral social media campaigns can quickly tarnish a brand’s public image. Financial advisors can help clients manage these vulnerabilities by implementing alternative risk management solutions.
Tailored risk management through 831(b) plans
Conventional policies remain a valuable tool for managing many types of risk, but as we have seen, they often fall short. So, what options do businesses have when insurers are unable – or unwilling – to meet their most pressing needs?
831(b) plans are one powerful solution. An 831(b) plan is a risk-management strategy that allows businesses to create their own captive insurance company to self-insure against specific risks. By setting aside pre-tax dollars into a separate insurance entity, businesses can fund reserves to cover potential losses, tailor policies to their unique needs, and retain unused premiums, providing greater flexibility and control over their risk-management strategy.
Congress created the 831(b) tax code nearly 40 years ago, in response to the liability crisis. Similar to what is happening today, premiums skyrocketed in the 1980s, due to a combination of factors, leaving many businesses without affordable insurance, or any coverage at all. Legislators recognized the need for an alternative solution that would empower businesses to manage risks outside the traditional insurance market.
Today, 831(b) plans remain a critical tool for businesses facing rising premiums, increasing deductibles, and growing exclusions. When properly implemented under the guidance of an experienced and reputable plan administrator, these plans allow businesses to build financial resilience, take control of their risk management strategies, and ensure compliance. This can give business owners confidence and peace of mind as they navigate an increasingly uncertain environment.
How to help clients stay ahead
Financial advisors have a critical responsibility to help their clients navigate the complexities of risk management, especially at a time when businesses are increasingly exposed to unpredictable disruptions. The middle of a crisis is the worst time to be scrambling for solutions. Here’s how advisors can help their clients identify and address potential risks before they escalate, ensuring they are prepared:
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Conduct a comprehensive risk assessment: Begin by evaluating the client's current insurance coverage to identify gaps and address all potential risks.
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Introduce alternative risk-management solutions: Help clients consider options, like the 831(b), that extend beyond standard insurance policies to manage those identified risks, protect their business, and secure the future.
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Highlight the benefits of self-insurance: Help clients understand the advantages of self-insurance, like customization, greater control, cost efficiency, flexibility, capital retention, and tax advantages.
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Stress the importance of compliance and good administration: Emphasize the importance of working with a qualified plan administrator to ensure the strategy remains compliant with tax laws.
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Offer ongoing support and adjustments: Regularly revisit and update the strategy as clients’ businesses evolve. By monitoring changes in their operations, industry, and the regulatory landscape, advisors can ensure their clients’ protection remains relevant and effective.
Conclusion
The major crises and regulatory pivots making recent headlines have one thing in common: They often involve risks that businesses fail to anticipate, despite their potentially devastating impact. Financial advisors can set themselves apart by pointing out overlooked liabilities and offering proactive solutions. By guiding clients through these challenges, financial advisors don’t just protect businesses in the short term—they help them weather whatever challenges may come their way.
Dustin Carlson is an efficiency-driven operational leader and champion of 831(b) tax solutions. As president of SRA 831(b) Admin, Dustin is on a mission to transform how businesses approach risk management, offering a viable solution for uninsured and underinsured liabilities. In 2023, Dustin earned his CPCU designation, further cementing his position as a trusted advisor to industry partners, and a prominent advocate for the 831(b) tax code through his efforts to promote its benefits and responsible use. Dustin holds a degree in finance from the University of Idaho.
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Advisor Perspectives welcomes guest contributions. The views presented here do not necessarily represent those of Advisor Perspectives.