RISK MANAGEMENT

PHYLOSOPHY
ERMAN A SUMIRAT
 RISK ON THE OLD TIME

 NATURE LOOKING

 MAGIC AND BELIEF

 Calculation Thought
Scenario Sales Profit

Safe and Secure 500 50

General Election

Minor Problem 400 30

in General
Election
Big Problem in 100 -5
GE
RISK ON THE MODERN TIME
 The Law of Probability (Pascal/Thermat)

 Utility Theory (Bernoulli)

 Regression to the Mean (Galton)

 Diversification Theory (Markowitz)

 Value at Risk, Stress Testing, Scenario

Analysis, Simulation and Monte Carlo
 What is Risk?
 Risk Management as a business:
 Early 1687, Edward Lloyd opened a coffee
shop in London. A place lately had chosen
for chatting and gathering information about
sea shipping and in 1696, Lloyd became
insurance company
 Lloyd’s of London then strongly become the
centre of shipping insurance in the world.
Lloyd established huge pools of risk and
expanding the business coverage. Risk
Management then traditionally identical with
insurance industries
 What is Risk ?(1)
 Asian Crises in 1997
 Flood in Jakarta, some failed to get claims

 Airlines accident

 Drivers whose age between 18 to 24 and

over 70, pays higher insurance premium
 Derivative Products

 Sub Prime Mortgage Failure

 Energy Prices
 What is Risk (2)
 What is Risk?
 To what extent people aware with this
term?
 Do we really think about risk when we will
do something?
 Do we care about risk?
 Does people have the same perceptions
about risk?
 Do we take rational decision and regard
risk management?
 Risk Definition
 Risk is a chance to deviate as a
consequence of something that
occurred.
 Risk is uncertainty from the
generated output in the future
 Limitation
– Limitation: dice, coin
– Unlimited: Y2K, global warming, financial crises
 Risk Terminology
 RISQ (Arab)
“Anything that has been given to you (by God)
and from which you draw profit”
Connotation: a fortuitous and favourable event
 RISICUM (Latin)
“The Challenge that a barrier reef present to a
sailor”
Connotation: a fortuitous and unfavourable event
 Risk
 Risk: Uncertainty concerning the
occurrence of a loss
 Objective Risk vs Subjective Risk

 Objective Risk = the relative valuation of

actual loss from expected loss, it can be
statistically calculated using a measure of
dispersion such as standard deviation
 Subjective Risk = uncertainty based on
person’s mental condition state of mind,
two persons in the same situation may
have different perception of risk
Chance of Loss
Chance of loss: The probability that an event will occur
Objective Probability vs. Subjective Probability
Objective probability refers to the long-run relative frequency
of an
event assuming an infinite number of observations and no
change in the
underlying conditions
It can be determined by deductive or inductive reasoning
Subjective probability is the individual’s personal estimate of
the
chance of loss
A person’s perception of the chance of loss may differ from the
objective
probability
A peril is defined as the cause of the loss
In an auto accident, the collision is the peril
- A hazard is a condition that increases the chance of loss
􀂄 Physical hazards are physical conditions that increase the
chance of loss
(icy roads, defective wiring)
􀂄 Moral hazard is dishonesty or character defects in an
individual, that
increase the chance of loss (faking accidents, inflating claim
amounts)
􀂄 Morale Hazard is carelessness or indifference to a loss
because of the
existence of insurance (leaving keys in an unlocked car)
􀂄 Legal Hazard refers to characteristics of the legal system
or regulatory
environment that increase the chance of loss
 Fundamental Concept of
Risk

HAZARD PERILS RISK LOSS

 Definition
 Peril
An event that can trigger to a LOSS
 Hazard
A condition which probably enhance a PERIL
 Loss
Loss or economic reduction due to a PERIL
 Risk
Uncertainty of an event can be a loss or a benefit
 PERIL
is enhanced by

HAZARDS
will cause a

LOSS
is

RISK
 Uncertainty Matrix
Limitation of Chance of Occurrence
Uncertainty
Known Known

Known Unknown

Unknown Unknown
 Risk VS Uncertainty
Risk Uncertainty

Quantitative Subject Unquantitative subject

direct to Object indirect to Object
Can be measured by Can not be measured
probability
Unknown but quantified Unknown and
outcomes unquantified outcomes
 What is risk management
The Concept of risk and uncertainty are related but yet are very
different. Uncertainty involves variables that are constantly changing,
whereas risk involves only the uncertain variables that affect or
impact the system’s output directly

RISK IDENTIFICATION

RISK EVALUATION

RISK QUANTIFICATION
 Level of risks
Extremely High

High
Medium

Low
 Introduction > Risk example
> Risk factors

> Shark

> Act of surfing

 Introduction > Risk example
> Risk factors

> Ladder construct

> Driver
 Theexpected situation is to know
any chance of occurrence and to
determine the probability for any
occurrence.

 Determining the limitation of

uncertainty will determine the
effectiveness of risk management
 People has their own perspective in
handling risk
 Hence, different perception
 Factors affecting Perception:
1.Experience

2.Knowledge
3.Culture

4.Position

5.Financial Status
6.Personal position in handling
situation

7.Complacency(Kepuasan dengan diri

sendiri)
 Frequency of Earthquake and Flood, its
connections with the sense of feeling secure
9.Time Span

10.Rose-tinted glasses

11.Single-mindedness
 Titanic
 Discuss
“ Risk Management can help you seize
opportunity not just avoid danger”

DAN BORGE
 Discuss
 The Water we clean our teeth
 The milk we use for cereal
 The train we catch to work
 Our PC System
 Key Staff, our right hand
 Purchase Order
 Interest Rate
 Merger
 Risk Dimension
 Until what time that risk still be occurred
?(time).
 The impact of risk (exposure).
 Chance of Risk occurrence? (probability).
 volatility
 Complexity
 inter-relationships of Risk
 Influence to Mitigate Risk
 Risk Financing? (cost effectiveness)
 Risk Cycle
 Risk and Our Action (1)
 We will be understand or
misunderstand about the uncertainty
limitation
 We can or can not determine the
chance of occurrence
 We have different perspectives
 There is always risks surrounding us
 We have to understand risk
dimensions
 Risk and Our Action (2)
1. Risk Awareness

2. Risk Measurement
3. Risk Mitigation

– (accept it),

– (control it),

– (avoid it).
4. Risk Monitoring
 Feedback

 Contingency Planning

 Pools of Fund/Additional Fund

 Risk Cycle

monitor

Manage

Accept

Identification Measure Minimize

Avoid
Risk Management Paradigm
Risk Identification

Risk Measurement

Risk Management

Risk Reporting

38
 Risk and Decision

High High

Generate control to Prioritize Action

Minimize exposure
Chance

Determine Contingency
Accept Risk Planning

Low
Low High
Impact
 Economic Environment
Domestic Global

Physical Market Political

Resources Opportunities Climate

Company
Social Factors Proposition
 Critical Thought
Risk can impact everybody
 From BOD to Office Boy

 From Logistic to Marketing Selling

 From Core Business to Supporting Function

 From Tangible Asset into Intangible Assets

 Critical Thought
Risk Can Occur All the Time
 24 Hours

 People

 Technology

 Reputation

 Investors /Speculators
 Discuss
 Japanese’s Kobe Earthquake
brought down one of the Britain’s
Oldest Investment Bank
 Subprime Mortgage threaten Asian
and European Financial Markets
 Indonesian Textile Manufacturers
are having difficulties in exporting
goods to overseas market
Elements of Risk Management

Understand range and magnitude of risks

Know what you don’t know

Communicate issues clearly

ROLE OF RISK MANAGER

MONITOR RISK OF A FIRM

IDENTIFY RISKS

MEASURE RISKS

REPORT RISKS

MANAGE - or CONTROL RISKS

Quantitative factors
Qualitative factors
ROLE OF RISK MANAGER
Qualitative factors
Owners, Management
Investments: LT earnings, no over-investment in sector
Products: demand, innovation vs. cost leadership or niche
Competition: Market entry barriers, pricing power
Risk evaluation
Government regulation
ROLE OF RISK MANAGER
Quantitative factors
Growth: Sales, Investments
Profitability: Operating and net margins, ROE
Risk: Sales and profit stability, capital structure, size, liquidity
Valuation: Ratios (P/E, P/S, P/BV, P/CF), Discounted Cash Flow
(Focus: capital costs)
Methods and TOOLS of risks
Scenario Analysis
What – If Analysis
The determination of what happens to
NPV estimates when we ask what-if
questions SIMULATION ANALYSIS
• ASSESS IMPLICATIONS OF
PARTICULAR Combination of scenario and
COMBINATIONS OF EVENTS sensitivity analysis
• NO PROBABILITY STATEMENT

Sensitivity Analysis
Investigation of what happens to
NPV when only one variable is
changed

Base, Worst, Best

Optimistic, Pessimistic
Base, Lower, Upper
Methods and TOOLS of risks
STATISTICAL ANALYSIS FIND PROBABILITY OF LOSSES

HOW TO ASSESS EVENTS WHICH HAVE NEVER OCCURRED?

Technical forecasting
involves the use of historical data to predict future values.
E.g. time series models.
Fundamental forecasting
is based on the fundamental relationships between economic
variables
quantitative measurements based on regression models and sensitivity
analyses.
Methods and TOOLS of risks
STATISTICAL ANALYSIS FIND PROBABILITY OF LOSSES

HOW TO ASSESS EVENTS WHICH HAVE NEVER OCCURRED?

Technical forecasting
involves the use of historical data to predict future values.
E.g. time series models.
Fundamental forecasting
is based on the fundamental relationships between economic
variables
quantitative measurements based on regression models and sensitivity
analyses.
Introduction > Why risk management

> increased certainty and fewer surprises

> better quality & service delivery

> more effective management of change
> more efficient use of resources
> better management at all levels
> management of contingent and maintenance activities
> …

1ISO/IEC Guide 73
 Why Companies have RM?

 “A risk aware organisation, capable of identifying

and managing uncertainty in order to maximise
opportunity & deliver max. value”
 “…Its primary aim is to help maximise business
value by doing the right projects, right the first
time.”
 RM quality “and the successful identification,
reduction, communication and control of risk are
key issues and performance drivers….”


 Critical Thought
Survivors will be those that hope for

the best but plan for the worst

 Mini Case Study
 Anggoro was very happy to receive
free gas stove from Pertamina.
Suprisingly he turned upset as the
gas stove blew up and destructed his
house. Although Pertamina also gave
the manual for using the gas stove
but BUMMM!!! The 3 kg gas
container blew up, firing his house
and it also impacted hundreds of
neighbours
 Mini Case Study (2)
 What is Risk facing Pertamina?
 Mini Case Study (3)
 Negative image of Pertamina
 Community will no longer using free
gas stove from Pertamina
 Community sue Pertamina
 Mini Case Study (4)
 Risk must be considered as 3 parts:
a. Risk is an event
b. The event is still considered as a
probability or a chance, it may or
may not occur
c. If it is occurred, it will generate
loss
 Different types of risks

MARKET RISK

CREDIT RISK

COMMON TYPES OF RISK OPERATIONAL RISK

LIQUIDITY RISK

SYSTEMIC RISK

INTEREST RATE RISK

 Critical Thought
Excellence is an art won by training
and habituation. We do not act
rightly because we have virtue or
excellence but rather we have those
because we have acted rightly. We
are what we repeatedly do.
Excellence, then, is not an act but a
habit
Aristotle
“If you take no risks, you will
suffer no defeats.
But if you take no risks, you will
win no victories”
R M Nixon (1913-94)