Insurance conditions are tightening once again. Premiums are rising, underwriting is stricter, and policy availability is shrinking. Carlson draws parallels with two prior insurance crises: in the mid-1980s, insurers retreated from liability coverage (leaving daycare centers and municipalities struggling), and again in the mid-2000s after Hurricane Katrina, when skyrocketing losses led to policy cancellations and steep price hikes. In each instance, Congress responded by introducing 831(b) micro-captive insurance plans, which enabled small- and mid-sized businesses to self-insure risks that weren’t adequately covered by traditional carriers. Carlson argues that although these tools have existed for decades, they often remain underutilized.

Today’s risk landscape—including cyber threats, reputational damage, and operational disruptions—is driving yet another wave of “insurance hardening.” Carlson emphasizes that as traditional policies become more expensive or restrictive, micro-captive plans can fill in critical coverage gaps and offer clients a proactive way to mitigate emerging exposures. He encourages planners to stay informed about market dynamics and consider whether 831(b) structures might serve as a strategic complement (not replacement) to conventional policies—especially for business-owner clients facing growing coverage challenges.

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What Your Clients Need to Know About the Insurance Crisis Déjà Vu

Insurance policies are getting harder and more expensive to procure. Some business owner clients may benefit from a look at micro captive plans to fill holes in their coverage.

By Van Carlson

Van Carlson is a visionary risk management strategist and pioneering expert in 831(b) solutions. As founder and CEO of SRA 831(b) Admin (www.831b.com), Van drives the company’s growth and strategy, focusing on educating business owners and trusted advisors about the benefits of 831(b) plans. Prior to founding SRA, he ran his own property and casualty firm for 15 years, earning top accolades, including Presidents Council honors. Van holds a bachelor’s degree in political science and government from Boise State University.

The insurance industry has a long history of crises that lead to skyrocketing premiums, dwindling coverage, and businesses left scrambling for protection. This cycle of insurance hardening has played out before—and we’ve seen its consequences.

In 1986, as insurers pulled back from offering liability coverage, businesses faced an unprecedented crisis. The Time magazine cover story from March 24, 1986, detailed the fallout: entire industries, from daycare centers to municipalities, were struggling to find or afford insurance. In response, Congress introduced 831(b) plans, a tax-advantaged tool allowing small- and mid-sized businesses to self-insure against risks traditional policies wouldn’t cover.

Just two decades later, in 2005, the market was again in turmoil. This time, the crises stemmed from natural disasters, notably Hurricane Katrina, which triggered a spike in claims and left businesses—especially small- to medium-sized ones—dealing with canceled policies, astronomical premiums, and policy exclusions. While 831(b) plans continued to provide an alternative, their potential was often overlooked, leaving many businesses vulnerable to risks no longer covered by traditional insurance.

Unfortunately, decades later, reading back through these moments it feels as though they could have been written yesterday. We are witnessing yet another wave of insurance hardening. Rising premiums, stricter underwriting, and the growing unpredictability of risks—cybersecurity threats, reputational crises, and business disruptions—leave many businesses exposed. Yet, 831(b) plans remain an underutilized tool, one that financial planners can leverage to help clients build resilience in the face of today’s insurance challenges.

Understanding 831(b) Plans

In times of insurance market hardening, businesses often find themselves at a crossroads. The rising premiums, shrinking coverage, and growing exclusions can stifle growth and innovation. It’s difficult to invest in new projects, expand into new markets, or experiment with cutting-edge technologies when financial resources are constantly redirected to meet higher insurance costs. Without adequate coverage, many businesses feel forced to scale back their ambitions, limiting their ability to take risks, innovate, and stay competitive.

An 831(b) plan, a self-insurance arrangement also known as micro captive insurance, allows businesses to set aside tax-deferred funds to cover risks that traditional insurance policies may not fully address. Similar to how the 401(k) tax code allows employers to set aside tax-deferred dollars for retirement, the 831(b) tax code enables businesses to reserve tax-deferred funds for underinsured or uninsured risks, such as business interruptions, cybersecurity threats, reputational damage, supply chain disruptions, product recalls, and legal liabilities.

Under the 831(b) tax code, small- and mid-sized businesses can create a self-insurance company that pools risks and provides coverage for these areas that are typically excluded from traditional insurance policies. Premiums paid into the plan are deposited into the self-insurance arrangement, and businesses are taxed only on investment income, rather than premium income. This tax deferral provides businesses with a secondary advantage, allowing them to allocate more capital toward managing their risks.

An 831(b) plan provides a long-term financial cushion that can be tapped into when unexpected liabilities arise. The self-insurance structure also allows businesses to customize their coverage to fit their unique needs, giving them more control over coverage levels and premiums. By self-insuring, businesses may reduce their reliance on traditional insurers. The funds within the arrangement can be reinvested, potentially generating growth to help manage future risks more effectively.

For example, during the California wildfires, many businesses found that their fire insurance only covered physical damage to their buildings. However, if their building remained intact but the surrounding area became uninhabitable, traditional insurance often did not cover the loss of income or other disruptions. In such cases, an 831(b) policy could cover business interruption, ensuring the business remained financially protected even if its physical location was unaffected but operations were disrupted.

When Is an 831(b) Plan Appropriate?

An 831(b) plan can be an ideal solution for small- to middle-market businesses that need a customized way to mitigate risks not typically covered by traditional insurance policies.

Unlike traditional insurance, which may not cover certain types of losses or comes with strict exclusions, an 831(b) plan allows businesses to reserve funds for catastrophic events. This is particularly relevant for risks like lawsuits, product recalls, warranties, or supply chain issues, where traditional insurers may limit coverage or exclude certain events.

Nearly every industry, from professional services to manufacturing, utilizes 831(b) plans. However, businesses in high-risk industries or those located in areas vulnerable to natural disasters benefit most. These plans address risks not well-covered by standard policies, such as wildfire-related business interruption.

Additionally, an 831(b) plan offers business owners more control over their risk management. By tailoring coverage to meet specific business needs, owners can address gaps in existing policies and design a plan that fits their unique circumstances. Unlike traditional insurance, where premiums are dictated by the insurer, the 831(b) plan allows owners to set premiums based on a collaborative risk assessment.

To ensure compliance, businesses must meet a stringent four-part test based on Rev. Ruling 2009-26 and recent court rulings:

  1. Risk transfer – contractual transfer of risk from the business to the insurer, typically through a direct writer issuing policies in exchange for premiums.
  2. Risk distribution – spreading risk across multiple unrelated participants to reduce the impact of a single loss.
  3. Fortuitous risk – coverage for accidental, unforeseen, or unexpected risks rather than routine business issues.
  4. Insurance principles – adherence to accepted insurance practices, including defined premium-setting methods, a claims process, maintaining reserves, and solvency.

By meeting these requirements, an 831(b) plan can offer tax-deferred contributions while helping businesses manage risks not covered by traditional insurance.

Practical Steps for Financial Planners to Evaluate Suitability

Financial planners play a critical role in evaluating whether an 831(b) plan is suitable for clients. First, assess the client’s risk exposure by reviewing existing insurance policies to identify coverage gaps—particularly in business interruption, supply chain, cybersecurity, and other liabilities.

Once the need is established, work closely with an experienced 831(b) plan administrator to assess which risks could be mitigated through self-insurance. The administrator ensures proper setup, compliance with tax laws, and ongoing adherence to the four-part test.

Educating clients on the long-term benefits and responsibilities of an 831(b) plan is crucial. Responsibilities include managing reserves, adhering to insurance principles, following contribution limits, and performing solvency testing. This understanding helps maximize benefits while avoiding compliance issues.

Conclusion

History suggests insurance hardening will recur. Just as 831(b) plans helped businesses during past crises, they can be valuable today. Financial planners can guide clients toward these tools by evaluating risks, working with experts, and providing education—helping businesses build resilience against inevitable market cycles.

Endnotes

Church, George J. 1986. “Nation: Sorry, Your Policy Is Canceled.” Time. https://time.com/archive/6673609/nation-sorry-your-policy-is-canceled/.

Glover, John E. 2009. “Section 831.–Tax on Insurance Companies Other than Life Insurance Companies Rev. Rul. 2009-26.” Internal Revenue Service. www.irs.gov/pub/irs-drop/rr-09-26.pdf.