To achieve this, the company’s owners is obliged to apply risk management in their business.

All levels management in the company must implement risk management. In fact, the shareholders should not only eager to get dividends, but they must apply risk management and care of the risks that may arise in their business.

Risk always comes up and the effect it could have unpredictable, if we never know the pattern. Therefore, businesses should take note and study the emergence of risks, including the frequency and activity, in order to know the pattern of risk for the business.

Why risk must be identified and managed? The answer is not hard to guess, that is because a risk contains cost that not small. A recent example of this occurred when a car manufacturer Toyota was asked to recall the vehicle / re-call a massive in the U.S. after a number of accidents occurred on some type of Toyota products. Errors may occur on the carpet floor of the car, the gas pedal that can make the car drove itself despite not being stepped on the gas pedal and brake systems. As a result, approximately 8 million vehicles of Toyota all around the world are withdrawn from circulation. This shows how expensive a risk. To regain the trust of users that had decreased, the car manufacturer of Toyota will reveal any damage or defects in the car that was repaired by Toyota, even the slightest damage. Steps to be taken by Toyota is the first conducted by car manufacturers, because actually there is no obligation for car makers to report minor repairs.

Anything else other risks which may be experienced by businesses, namely the increase in raw material prices.

Well, here’s where the importance of risk management. Effective risk management can minimize risk and cost of maintaining company performance.

Risk management related to the principle of Good Corporate Governance (GCG), where the principle of transparency in GCG implementation of enterprise-wide demands of risk management by companies.

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Risk Return Trade-off
In investing, investors must expect the return. However, in investment you are faced with the fact, that is a risk-return trade off. If you want get high returns, of course the risk is also high. Similarly, if you want a safe investment and low risk, then the return is small.

In every investment, it must contain the risk. Whether you invest it in stocks, bonds, even though safe as bank deposits. Therefore, you certainly can not avoid the risk of investing. However, you can still try to manage and minimize risks, one of way is diversification.

Risk itself is divided into two types, that are, systematic risk and unsystematic risk. First, the systematic risk or market risk is the risk that is `given` and `embed` in the market as a whole. These risks can not be diversified. Second, the unsystematic risk is risk owned by a company or industry specific, so that each investment has a different risk. This unsystematic risk can be minimized through proper diversification.

Portfolio Management Strategies
People often ignore diversification. The reason, minimize the potential for diversification of their return. So they chose to hold only one type of asset, such as stocks. The result, of course they have a large potential return. But if a sudden decline in market conditions significantly, of course, they also exposed to enormous losses.

How diversification can minimize your risk?
Diversification is a strategy in portfolio management to minimize the risk by combining a variety of different investment which have correlation as small as possible. Do not forget that the risk that can to diversify here is unsystematic risk.

What is correlation? Correlation describes how much the relationship between the movement of two assets. If the correlation is 1.0 for both the asset moves right direction. Meanwhile, if the correlation is 0, then the second movement of these assets had nothing to do, or can be called random. Then, if the correlation is -1.0 so the two assets move in exactly the opposite direction.

It is difficult to find correlations just right opposite direction of -1.0, so we try to make a portfolio with assets as low as possible. Why do we want a low correlation between asset? This is due to the lower correlation, then return the assets do not move in the direction. So, when the return of an asset to weaken, then the return from other assets less weak, or actually even stronger. Examples are stocks and bonds, which both have a low correlation. As the stock soared, then bond prices lower. Meanwhile, when the stock fell, the bond becomes the best choices.
Thus, poor performance of one asset in the portfolio can be covered by the performance of other assets. Thus, the portfolio is expected to produce maximum performance, and can minimize the risk so can avoided extreme losses.

After understanding the principle of correlation, now how can you diversify? Diversification generally can be done in two ways.

First, vertical diversification, the investment allocated to various asset classes, ranging from cash, bonds, property, stocks and other asset types. These assets have different characteristics, thus creating a different return in accordance with the conditions occur.

Second, horizontal diversification, such as you allocate different investments in one asset class. Here, you try to minimize the risk of specific sectors and specific companies, such as investing in stocks.

Diversification, in practice difficult to produce an optimal portfolio, ie the optimal return with low risk. In theory you can accomplish with the efficient frontier method, which produces the most efficient combination of assets. In fact, normally diversified portfolio will produce a composition of lower risk with a moderate return. With diversification, you will not only minimize the risks, but also maintain and enhance your investment in the long run.

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Globally, we see that the market movement is determined by the market risk appetite as a whole. For example, when the condition is optimistic, the market tends to like risk, so that puts more money in stocks or currencies like the euro or sterling. Meanwhile, when the condition of pessimism, then the markets tend to avoid risk, so investors fled to the safe-haven investments such as U.S. dollars or gold.

Meanwhile, the market itself is formed from a collection of individuals who have different risk profiles. This risk profile should determine investment strategy. The absence of recognition of good risk profile is one of the factors that triggered the failure of investing. For example, a person who suffered losses and give up investing in the stock, when in fact he was not ready for the `minus` in the portfolio.

Before determining an investment strategy, an investor should first have to identify the risk profile. Actual risk profile can be divided in many categories, but for this article we just limit it as much as five categories.

Conservative
People are being conservative is not like risk. They were not able to tolerate if they reduced investment. They want stability, thus protecting their portfolios from potential losses. Their focus is generally short term. As a consequence of these conservative attitudes, they are also willing to not get high returns from the market.

Besides perhaps because preferences, conservatives may also be caused by the condition of the investor. For example, because it’s quite tight financial conditions and the investment budget is only a little, so they are not strong if it had to bear the loss. Or do investors have retired, so they rely solely on investment income alone. However, instead of investing here is not risky. Because of the small profit, it is potentially undermined by the inflation or tax.

Appropriate investment options for those who are usually conservative profile more allocations in cash or cash equivalents such as deposits, money market, money market mutual funds and some fixed income instruments, fixed income mutual funds and only a small portion placed on the stock. Composition of about 40-50% in cash and cash equivalents, 40-50% in fixed income instruments, and 10-15% in stocks.

Moderately Conservative
This type of investor with a conservative, because they avoid the losses in the short term, but still trying to obtain higher profits in the long run. Investors are still willing to face some level of volatility or losses in the portfolio.

Typically, these types of investors are those who are retiring or have already retired. In addition, those who ever had a bad experience in investing and also include into this category.

Portfolio investment that suitable for this investors is more in cash & cash equivalents, money market mutual funds and fixed income instruments and fixed income mutual funds, with a considerable number of allocations to stocks. Composition of about 30-40% in cash and cash equivalents, 40-50% in fixed income instruments, and 10-20% in stocks.

Moderate
Investors in this risk profile was willing to accept risk in moderate levels. They want a good return, so they are willing to accept some risk. They want portfolio performance better than the market, but they also do not want portfolio fall when bearish market.

Most of the investors included in this classification. The reason for this variety, there are preparing for retirement, there is a set of education funds, funds to buy a house, and so on.

A suitable investment portfolio is balanced between fixed income instruments and fixed income mutual funds with shares instruments. Portfolio composition including approximately 10% cash / cash equivalents, 40% fixed income instruments, and 50% in the stock instruments.

Aggressive moderately
These investors are willing to accept some substantial risks. Their focus is on improving portfolio performance, so willing to face the high volatility in the portfolio. They want to invest quite aggressively, but also do not want to experience many losses in a short time. This type of investor is willing to wait for profits in the period of time long enough, in order to recover losses that may suffer in the short term.

Investment portfolio that works for people with such profiles are a small number of fixed income instruments, and more allocation to the stock instruments. Portfolio composition including about 5% in cash / cash equivalents, 20% in fixed income instruments, while 75% of the stock instruments.

Aggressive
These investors are well aware that they are exposed to great risk, even more than the market risk. They are focused to obtain the portfolio performance above average, so they also are willing to face the high volatility in the market. They are well aware that investments can generate investment does run out, even up to significant losses.

Usually that have aggressive profiles are those who are young and well established. Here, aggressive investors can allocate a number of investments in derivative instruments such as forex, index, or option.

Portfolio that are suitable for aggressive investors who are allocated much more for stocks, and only slightly on fixed income instruments. The appropriate composition of which is 90-95% in shares or derivative instruments, and the remainder in fixed income instruments.

Speculative
This type of investor is more than aggressive, because they are not only aware of the big risks, but rather `find` risks for potential huge profits. For them, investment is increasing their adrenaline activity. Portfolio suitable for speculative investors are more allocation for derivative instruments, a number of stock and very little in fixed income instruments. The appropriate composition of which is approximately 50% in derivative instruments, 45% of shares, and the remainder in fixed income instruments.

So are the various risk profiles and investment strategies accordingly. Which one you enter the category ? Know and recognizing your risk profile first, then determine the appropriate investment strategy!

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Credit risk is the inability of customers to fulfill the obligation to pay back. Market risk is the fluctuation in asset values caused by changes in market prices and yields. Liquidity risk is an inability to accommodate the maturing obligations and withdrawals as well as asset growth and financing to meet obligations at a reasonable market price. Operational risk is the potential losses and incidents involving people, processes, technology, legal issues, external events, compliance, or reputation.

To assess risks, in a risks of bank is discussed and assessed at the Board of Commissioners and the Board of Director level using a comprehensive committee structure, which described the Business Risk Management and Governance at the Bank.

Here is an example of how a bank arrange committee involved in risk management. The committee consists of:

1. Risk Management Committee
2. Risk Committee and Credit Policy
3. Asset and Liability Committee
4. Market Risk Committee
5. Operational Risk Committee and Information

Risk Management Committee
This Committee meets at least three months to determine and analyze the level of risk associated with bank business, existing business opportunities and bank capital adequacy. Decisions of this committee was poured into operational policies and guidelines for all levels of the organization.

The task of this Risk Management Committee is to undertake a review of:
1. Framework and risk management governance
2. Direction, strategy and risk management programs
3. Risk profile and capital adequacy analysis
4. Policies and implementation of risk management
5. Risk management measurement methodologies
6. Emergency plans (Contingency Plan)
7. Adequacy of backup deletion

To assist the committee’s role, then the control and inspection carried out independently of the operational aspects of the bank by the internal audit by the Comptroller chaired.

Risk Committee and Credit Policy
Credit risk here is intended as the inability of debtors to repay their obligations to the Bank. Credit risk is managed by the study on:
1. Credit and portfolio diversification (business segment / sector
industrial / debtor);
2. Credit policies and procedures;
3. The adequacy of backup removal;
4. Determination of indicators credit risk profiles and credit risk measurement methods

Asset and Liability Committee (ALCO)
Liquidity management involved in Bank activities in maintaining the various of financing capacity, current assets and other cash resources to accommodate fluctuations in the level of assets and liabilities resulting from business disruption or unanticipated events. Banks manage liquidity risk at several levels of the Division of Finance, Accounting and Planning to formulate strategies that liquidity and interest rates, Treasury Division manage liquidity and interest rates are operational and ALCO committees oversee the position and condition of bank balance sheets compared to market conditions and in meeting monthly to determine the optimal strategy for managing these risks.

ALCO focused on the amount of current assets, the Bank’s ability to raise funds from the interbank money market, bank financing structure, maturity of assets and liabilities, interest rates and market trends, adequacy of future funding and macro economic conditions.

Market Risk Committee
Market risk is the potential losses caused by changes in market prices and yields. Market risk is closely linked to customer bank loans, deposits, trading activity, securities and derivative products. Market risk is managed within the overall limits and risks using hedging techniques. All the trading activity in relation to foreign exchange, derivatives, money markets and securities monitored every day and studied with mark-to-market basis within the limits set by the Market Risk Committee.

Operational Risk Committee and Information
Operational risk is the potential losses caused by an event that involves people, the failure of process, technology, legal issues, external events, compliance regulations and so forth. Under the Bank’s governance structure, each business unit is responsible for the risks that occur in the operational activities of daily with reference to the policies and procedures, control and routine monitoring. In addition, the bank’s risk profile and the overall internal control system has been developed and monitored by the Operational Risk Committee and the Information, which focuses attention on the operational risks associated with product development, systems, human resources and the principle of ‘know your customer’ as an aspect of prevention against the possibility of fraud and malpractice.

Audit Control
In addition to the system and risk management committee, the Bank has formed a special function in it intern control system. Bank Audit Committee to review the role of each Bank’s operational activities. Internal audit independently carry out assessments in all areas and business units systematically, to discuss control issues, adequacy of policies and procedures, adherence to central bank regulations and internal rules and the effectiveness of supervision and management structure.

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Various events in the world has an important contribution to the evolution of risk management, ranging from World War I and II, Great Depression, terrorist attacks, the Asian crisis, Enron and WorldCom scandals, Madoff scandals, until the latest of the global economic crisis that resulted in the fall Lehman Brothers.

People have always tried to learn from experience. The experience provides a valuable lesson so that we do not fall on the same mistake again. Likewise happened to risk management. We tried to minimize the risk with manage it. If it still leaks, then the risk management system repair, and so on.

The crisis this time one of them caused by poorly functioning of risk management in various areas, which resulted in a complex crisis, and have significant impact on people around the world. Starting from granting debt far exceeds the ability to pay, rating agencies which published the rating overstated, the financial institutions are not aware of exposure to derivative products, and a series of other errors.

A number of experts from Wharton assume that too many people who blame risk management models, but it approaches should be corrected. Recommendations from them in order to make risk management more effective.

A comprehensive perspective of risk
Companies must have a broader picture of the risk, not only by risk alone. The trend is happening right now is to sort out the operational risk, market risk, liquidity risk, credit risk, and so on. And, in fact these risks linked to each other, so that without a comprehensive understanding of the risks the company can result from exposure to a big problem.

Risk Management 2.0
If the risk management 1.0 view of how the condition or the company’s current investment and analyze the potential risks occur, it is different with risk management 2.0. Risk management 2.0 is not only focused on risk analysis can provide a direct impact on the company, but furthermore the indirect impact.

Indirect impacts analyzed are potentially affected suppliers or business partners own the company. The more a company depends on a single supplier / business partner, the more strongly the importance to analyze the risks faced by suppliers / business partners. This is because if there is unwanted interference in their then potentially disrupt the company’s business also.

Challenge Assumptions
Form a team consisting of people with the best knowledge, who have foresight and challenging assumptions about the future. This team next task is to explain the risks and events that may occur in the future, which previously had been unthinkable.
To do this, there is now also have a variety of advanced technologies and software that is used to identify risks, such as technology, track and trace, SAP and others.

Complete Quantitative Data with Qualitative
In general, the measurement of risk to produce quantitative data. However, quantitative data is necessary also equipped with qualitative data, in order of business at a more comprehensive risk. Qualitative data can be obtained through benchmarking, judgment, until the discussion other companies, regulators, suppliers, governments, customers, to employees. Thus, we can gain insight about the risks involved and previously unthinkable.

Risk Considerations Many times
Consideration of risk is not enough just to be done once, but done in several stages during the business operation, starting from the stage of strategic planning, budgeting, and so on. Risk is also important to be discussed in more depth periodically, or when there is a big change, a potentially greater impact.

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As a positive economic outlook, or when the economy was booming, so the more dominant in the market is risk appetite. Risk appetite encourage people to do carry trade and invest in riskier assets and higher profits.

Carry Trade, Investment in Risky Assets
What is the carry trade? Carry trade is an activity of arbitration, where investors take out loans in currencies that have low interest rates, to then be invested in assets in the yield that  have higher interest rates in other countries.

For example, investors or speculators to borrow money in Japan that have low interest rates, to then be invested in Brazil, Australia or New Zealand who have a high interest rate. By investing in countries with high interest rates, it is expected that he could earn more profit than if it invested in Japan. Furthermore, the results of these investments brought back to Japan, and partly used to pay debts.

Carry trade is done usually if investors perceive that the value of yen will not appreciate in the future, so they can continue to borrow in yen, and investing abroad. If expectations will turn into yen appreciation, investors would do unwinding carry trade, which we will discuss later.

In addition, investors who do carry trade generally invest in assets that have more risky. The risk assets among stocks, ETF, until more complex derivatives instrument such as index.

Unwinding Carry Trade, Safe Haven Investment
Conversely, when the economy changes to pessimistic outlook, then the dominant is risk aversion, where interest in a decreased risk. Risk aversion encourages investors to do unwinding carry trade and flight to safety into the safe-haven investment.

What is unwinding carry trade? unwinding carry trade is the inverse of the carry trade. In the unwinding carry trade, investors took off position on a currency with high interest rates or risk asset, and move to a safe-haven investment and / or low interest rates.

Unwinding carry trade can be seen for example when the financial crisis. While the global markets falling apart, investors vying to switch to a more investment safe haven, including a commodity, like oil and gold that could be an instrument for hedging against inflation. Bonds also became an investment option, because the price increases when interest rates even lower. High yield currencies such as euros or sterling are falls, and investors turned to safe-haven currency, such as dollar and yen.

What is the effect produced by the unwinding carry trade? Let’s examine. For example, Japanese investors who previously did carry trade in Europe and then to do unwinding carry trade. They returned to Japan with the results of its investment in Europe, then sell the euro currency was in exchange for yen. Because many investors are buying yen, the yen appreciates, and vice versa currencies with higher yields weakened. The reverse is true in carry trade.

Therefore, in investing, then you’ll want to understand how the market conditions of interest in the risks. Then you’ll determine the appropriate investment instruments.

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Why do we need a disaster risk management?

First, a disaster do not know when it comes. Natural disasters are now happening more and more, ranging from earthquakes, tsunamis, floods, landslides, and others. On the other hand, the growing world population, resulting in the potential impact of the disaster also produced greater. Disaster risk management is essential thing to do for country which located in earthquake prone areas.

Second, large-scale disasters often cripple economic activity of a region. Buildings were destroyed, many lives and injuries stolen, damaged factories, businesses blocked and even total halt, thus disturbing the business performance to paralyze the economy.

Third, globalization is now making its risks are now global, not just local residents. Disaster experienced in some areas, also affect other areas as well. This not only applies to natural disasters, but also in the case of financial crisis, climate change, to terrorism. For example, if the business stops operating, the operation resulted from business partners are also affected.

Therefore, every business also should have a business continuity planning (BCP). BCP is a comprehensive plan designed to ensure business continuity in case of disaster stricken or other disturbance. BCP helps businesses to stay despite facing major events such as earthquakes, tsunamis, fires, floods, terrorism to pandemic; or more minor events such as the loss of key staff, supply chain problems and more.

Business leaders must both identify and measure the impact of an event for business, to further create a BCP. This plan covers not only the location / physical building, but also the process and the people in it. BCP is then must be communicated and trained with all employees, so when it does occur can be prepared and responsive. This plan is continuously evaluated, taking into account factors that might be a real happening.

The world realize the importance of BCP, especially after the terrorist events of 9 / 11 that resulted in many business activities paralyzed. In fact, more than half of businesses affected are now no longer in operation. One of the lessons learned from these events is the company must have a data center back-up remote from the main data center.

Merrill Lynch is one company that does the decentralized system of its information technology after the attacks of 9 / 11. The attack resulted in them losing two data centers. Now, their data centers located in Staten Island, while the back-up in New York.

Similarly, business continuity planning is essential in facing the uncertainty risk. With the business continuity planning, the disaster can be effectively addressed, and helping businesses survive and carry on its operations.

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1. Understanding about insurance
Insurance is a transfer of risk from the first party to another party. Controlled by the delegation of legal rules and the application of the principles and teachings that are universally adhered to by the first party or other parties. In terms of economics, insurance is a collection of funds that can be used to cover or pay compensation to people who suffered losses.

2. Benefits of Insurance
Besides as a form of risk control (financially), insurance also has a variety of benefits that are classified into: the main function, secondary functions and additional functions. The main function is as a transfer of insurance risk, premium collection and fund balance. Secondary function of insurance is to stimulate business growth, prevent loss, damage control, social benefits and the savings. While as an additional function, insurance as an investment fund and invisible earnings.

3. Are all risks can be insured?
Not all risks can be insured. Risks that can be insured among other: the risk that can be measured by money, the risk of homogeneous (the same risks and enough guaranteed by insurance), a pure risk (this risk is not profitable), particular risk (the risk of individual sources), the risk that occur suddenly (Accidental), insurable interest (the insured has an interest in the object insured) and the risks that are not contrary to law.

4. Asset Definition
Asset is anything which has a trading value or economic value. An asset can be tangible (visible, for example: cars, houses, land, a cow, plant, etc.) or intangible (can not be seen, for example: the talent and abilities). Insurance business aimed at protecting the economic value of these assets.
Human life is a very valuable asset that can bring in revenue. These assets also face risks such as death, illness or disability caused by accident. Risks such as disability and death make a person unable to earn income. This resulted in the parties that depended on him, such as family difficulties.

5. Disaster and Risk
Flooded, sick, hit by another vehicle, earthquakes, landslides, deaths and other unfortunate examples. Damage or destruction that may be caused by the disaster is a risk that owned by assets. Understanding ‘risk’ in the insurance or the means of the possibility of loss or destruction of uncertainty faced by an ‘asset’ that can cause economic losses.

Insurance Principles

In the insurance world there are some basic principles that must be met, namely:

1. Insurable interest
The right to insure, arising from a financial relationship, between the insured with the insured and recognized by law. In accordance with the purpose of life insurance, each person is considered to have insurable interest in his own, including their partners and family life.

2. Utmost good faith
In a contract, generally each party involved can learn the product and the subject of the contract. But in life insurance, which is a product / subject is the life of someone. Only a insured parties understand all the risks associated with him. It is the task of the insurer and the insured parties to implement in good faith among one another. The insurer must honestly explain everything clearly about the extent of the terms / conditions of insurance and the insured must also provide a clear and correct for objects or interests of the insured.

3. Proximate cause
is a cause of active, efficient chain of events that led to led to a result without the intervention of the start and actively from a new source and independent.

4. Indemnity
A mechanism which provides financial compensation insurer in an attempt to place the insured in a financial position that he had just before the occurrence of losses.

5. Conditional
Life insurance contracts have a requirement. Insurer parties bound  promises to pay compensation if certain requirements are met.

6. Unilateral
Life insurance contract is essentially unilateral. Only one side, the person who has a legal promise that must be implemented. The insured party can not be legally forced to pay the premium.

7. Aleatory
If the insured dies after paying a one-time premium, the heirs will receive full compensation (the number is likely much larger than the one-time premium) In contrast, insurance companies can earn more than the premiums rather than cash compensation should be paid.

8. Personal
Life insurance contract is personal. Someone must be insurable interest in himself, but others may not have an insurable interest in that person. Thus, the life insurance contract can not be transferred to others.

9. Valued
Under the insurance contract, insurer agreed to pay some compensation when losses occur. Sums paid to these beneficiaries may or may not have a relationship with the quantitative amount of losses resulting from the death of the insured.

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