In a world that is increasingly volatile, uncertain, complex and ambiguous (VUCA), organizations must better prepare for emerging risks. Michael Zuckerman, associate professor of risk and insurance management, shares his expert opinion in the recent article published in Captive International, “Seeking risk management equilibrium in a VUCA world.”
Captives are insurance companies within an organization whose purpose is to protect its owners from risks. In a VUCA world, Zuckerman stresses that organizations must develop new risk management strategies for a changing risk landscape that include using captives.
“I was first introduced to the captive insurance concept in the late 1980’s when I was working in an insurance brokerage firm. It became clear to me that captive insurance companies, when governed properly, enable an organization to more effectively manage risks that mattered to them,” says Zuckerman. “The reason I put a great emphasis on using captives to drive risk management in a VUCA world is because it connects an organization’s senior management and Enterprise Risk Management teams. This connection strengthens the risk management process, required by a more complex world.”
In his research, Zuckerman emphasizes the great power that captive companies have and how they promote risk management in organizations. Captives are not just focused on insurance, but rather how to manage the risk of the organization by looking at all the risks of the enterprise. They also do not require the same level of regulations and protections as insurance companies.
Zuckerman also points out that if companies understand its mission-critical relationships and the risks associated with them, then they are better able to meet the needs of its stakeholders. These relationships will have better value in a VUCA world. The organization is more likely to increase its value if they understand risks and build a risk management framework through using tools like a captive.
In his research, Zuckerman also investigated the importance of organizations partnering with the government to build stronger relationships with businesses. This public-private partnership is critical to developing a resilient and sustainable organization in a VUCA world.
“The United States is the largest economy in the world, so the rest of the world seeks our leadership to address VUCA issues, such as climate change and pandemics,” says Zuckerman. “An important tool for an organization’s risk mitigation effort is partnering with government. This is why I am advocating for the idea that the government has to be willing to become an enabled risk management partner. The impact from climate change and pandemics, for example, are just too significant for any organization, or country, to manage alone,” he continues.
Zuckerman concludes that organizations need to question why they were not better prepared to mitigate the devastating disruption that COVID-19 brought upon the economy, despite the warnings that the pandemic was coming and its potential to disrupt people’s lives, global supply chains, and the economy. Leading nations must be prepared to identify and assess the key VUCA warning signs. They must be prepared to invest in risk control and financing to reduce volatility and uncertainty, because reducing disruption in a globally connected economy is one avenue for making the world less ambiguous.
“I hope that lesson learned from the pandemic is how we can use data and science to develop key risk indicators to be better prepared to address a VUCA world,” says Zuckerman.