RISK MANAGEMENT

PHYLOSOPHY
ERMAN A SUMIRAT
What is Risk?
 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 ON THE OLD TIME

 NATURE LOOKING

 MAGIC AND BELIEF

RISK ON THE MODERN TIME
 The Law of Probability (Pascal/Thermat)

 Regression to the Mean (Galton)

 Diversification Theory (Markowitz)

 Value at Risk, Stress Testing, Scenario

Analysis, Simulation and Monte Carlo
 Fundamental Concept of
Risk

HAZARD P E R IL S R IS K 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
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
RISK VS UNCERTAINTY
 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
 Risk example
> Risk factors

> Shark

> Act of surfing

 Risk example
> Risk factors

> Ladder construct

> Driver
 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
 Economic Environment
Domestic Global

Physical Market Political

Resources Opportunities Climate

Company
Social Factors Proposition
 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

WHY RISK MANAGEMENT?
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
> …

1
ISO/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
 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 risks, you will suffer
no defeats.
But if you take no risks, you will
win no victories”
R M Nixon (1913-94)