From: Captive Insurance Times

Temple University’s Michael Zuckerman explains how a captive can be used to help manage complex risks associated with climate change, pandemics, and supply chain

We are living in a VUCA period. The elements of a VUCA Business Environment, according to the Centre for Executive Education, are Volatility, Uncertainty, Complexity, and Ambiguity. VUCA is an acronym that arose in the 1990s from the US Army War College strategic leadership training to describe a more volatile, uncertain, complex, and ambiguous, multilateral world that emerged from the end of the Cold War. The relevance of VUCA for risk managers is that climate change and pandemics are challenging to predict in terms of frequency, severity, aggregation, and timing of impacts arising from these specific perils or threats. The more uncertain and volatile our environment becomes, the greater the need for alternative risk management tools.

So, what do climate change, pandemics, and supply chain disruption have in common? Business interruption! Managing risks to business operations associated with climate change, pandemic, and supply chain are becoming more complex, and, therefore, we have less clarity, or more ambiguity, about what is the appropriate investment balance between loss prevention, mitigation, and risk financing. We may be able to identify the inherent risks associated with our business environment, but it is far more challenging to assess the residual risk. There is much debate about the difficulty of modelling the likelihood of and impact from pandemics and natural catastrophes. What we do know is that these events will substantially disrupt our business operations and supply chains. Moreover, there is also a growing interrelationship among the various risks associated with these events. For example, a health care crisis quickly becomes an economic crisis resulting in increased hazard and operational risk to our personnel, IT sysems, data privacy, premises, business operations, suppliers, customers, boards, and earnings before interest, taxes, depreciation and amortisation (EBITDA).