Risk management is a process for the risk that includes identification, evaluation and control of risks related to security activities, whose purpose is to maintain the property and personnel of the company against losses due to crime, and all the social disruption and disorder of nature, which may endanger the life and development of the company.
Risks in insurance are the uncertainty of the occurrence of an event that could cause economic losses.Examples of various risks, such as the risk of fire, hit by another vehicle, the risk of flooding in the rainy season, the risk of earthquakes and so on, can cause us to bear losses if the risks are not we anticipated from the beginning.
The purpose of risk management practices in the insurance industry is basically no different from other industries. The goal is to minimize and manage the risks which impact negatively on the purpose, vision, and mission.
In the basic theory of risk management, its phases are to determine the context (scope and objectives), risk identification, risk analysis, and control risk.
It is a fact that can not be avoided by every human life. With knowing this fact does not mean we will
live in worry and fear in through the day.
God has created man as creatures of the highest rank among other living beings because humans have feelings and reason for distinguishing between what is good and not good, right and wrong.
Risks in life as described above cannot be avoided and eliminated. Neither can we run/hide from such risk, but there is could we do to deal with these risks, namely minimize risk or transfer risk when we realize that we have a limited ability.
Major Risk And Form Of Risk
Two major risks that could be diverted to insurance companies are:
- Risk of own self
No limited to loss of revenue, but including also a healthy condition or sick, died, unable to work (disable), old age, and others.
- Risk of the asset or property.
Possible loss directly or indirect property owned due to fire, storm, natural disasters, theft, and other disasters
All the risks mentioned above is a pure risk, ie that can be protected.
Pure risk occurs suddenly (not intentional), are rare, and the costs of loss can be predicted or taken into account.
The forms of risk, namely:
a. Pure risk is the risk as a result which is caused by two events: a loss or breaks even, for example, theft, accident or fire.
b. Speculative risk is the risk as a result which are caused three events: income, profit, or break-even, for example, is a gamble.
c. A particular risk is a risk that comes from individual and local impacts, for example, is a plane crash or car crash.
d. The fundamental risk is the risk which is not come from the individual and the impact area, for examples are hurricanes, earthquakes, floods, and storms.
Six insurable risks as follow:
- The risk can be measured by money.
- Risk homogeneous (the same risks and pretty much covered by insurance).
- Pure risk (the risk is not profitable).
- Particular risk (risk of individual sources).
- Risks that occur suddenly (accidental) not because planned, but purely due to eg an accident.
- Insurable interest means that the insured has an interest in the insured object.
5 Characteristic Of Loss
Characteristics of loss are:
• must be being accidentally
• should be determined (time and value)
• must be significant (large)
• should be taken into account
• not to burden the company insurance
From the above explanation, we expected more aware of what is actually done by Insurance company to us, they bear the risk upon ourselves or above ours that we insure.
After knowing this, further, we need to know what needs to be insured because not all require insurance.
A client in Financial Planning will be analyzed by a Financial Planner or Financial Advisor, visits from health conditions, family, and finances, for determine precisely what insurance is needed by the client and his family.
Risk Management Stages
Three stages of risk management are:
- Identify Risks
- Analysis and Evaluation of risk in terms of severity (risk value) and frequency
- Control of risk, where the risk control is divided into two:
a. Physical Control (Risk eliminated/minimized)
Eliminating risk means eliminating all possible losses. For example: When driving in the rainy season, limited to a maximum vehicle speed of 60 km / h. Minimizing risk is done with efforts to minimize losses.
b. Financial Control (Risk detained, the risk is transferred)
Restraining means to bear the risk of the whole or part of the risk, for example by forming reserves in the company to face the losses that would occur (retention). While diversion/transfer of risk can be done by moving the disadvantages/risks that may occur to the other party. For example, transfer risk to the insurance company
Main Function Of Risk Management
Risk management having some fundamental function as follow:
- To Find Potential Losses
It means working to locate/identify all risks faced by the company.
- To Evaluate Potential Losses
This means that the evaluation and assessment of all potential losses faced by the company.
- To Choose Engineering / The right way or to specify a combination of appropriate techniques for coping with loss.
Due to the dynamic nature of the risk, then it should always do a review and monitoring. To implement required risk management guidelines, which could contain the risk management policies and procedures.
In addition, risk management should be executing, so it’s necessary organizational structure and anyone else involved in their implementation.
For each type of company, they can have different shapes, either policies, procedures, organizational structure, and the people involved.In terms of structure, for example, for a large company might require a special unit to deal with risk management.