Battling Inflation’s Blow: How Businesses Can Stay Resilient with Captive Insurance

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By Randy Sadler, CIC Services

Inflation, once a periodic worry, has now become a persistent adversary for businesses across the globe. Despite some cooling, inflation remains elevated, well above the Federal Reserve’s target of 2%, with experts like J.P. Morgan forecasting core inflation to stick around 3% in 2024. While the shockwaves of inflation reverberate across sectors, certain industries, like restaurants and retail, are being squeezed tighter than ever. With input costs skyrocketing, wages rising and unpredictable supply chain disruptions, the question is: How can businesses safeguard themselves from the worst of inflation’s fallout?

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. Even though you can’t directly insure against inflation (there’s no singular triggering event), 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 like restaurants and retail. The pressure to maintain profitability is immense.
• Escalating Labor Costs: Inflation pushes wages higher, straining businesses that are already grappling with tight labor 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 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 Behavior 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—like 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: The Game-Changing Strategy for Inflation’s Risks

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:

1. 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.
2. Cushioning Rising Labor Costs
   As wages climb during inflationary periods, a captive can help by providing wage indemnity coverage. This means that businesses can offset labor 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.
3. Safeguarding Revenue During Consumer Downturns
   Captive insurance offers protection against revenue losses triggered by inflation-induced changes in consumer behavior. 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.
4. 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 specialized coverage that protects against these price swings, giving companies the stability they need to manage operations confidently.
5. 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 not only offers long-term savings but also provides a tailored solution to inflation’s many challenges.
6. 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 defense against the indirect consequences of inflation without relying solely on volatile external markets.

A Real-World Example: How One Restaurant Chain Beat Inflation

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 also 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 not only protected itself from inflation’s fallout but emerged in a stronger position, better equipped to navigate future economic uncertainty.

Preparing for the Future: 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 from 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.

About the Author

Randy Sadler started his career in risk management as an officer in the U.S. Army, where he was responsible for the training and safety of hundreds of soldiers and over 150 wheeled and tracked vehicles. He graduated from the U.S. Military Academy at West Point with a B.S. degree in International and Strategic History with a focus on U.S.–China relations in the 20th century. He has been a principal with CIC Services, LLC for seven years. In this role, he consults directly with business owners, CEOs, and CFOs on the formation of captive insurance programs for their businesses. CIC Services manages more than 100 captives.

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