Risk Management

and Insurance
For Students
Dr. Reza Ronaldo, MM, CGI, CIIB, ANZIIF (Senior
Associate), CIP, CRMP, CRGP, CHRP. CCIP, AIIS, FIIS.
Risk Management
and Insurance
For Students
Dr. Reza Ronaldo, MM, CGI, CIIB, ANZIIF (Senior
Associate), CIP, CRMP, CRGP, CHRP. CCIP, AIIS, FIIS.
 JUDGEMENT
Risk Management and Insurance
Author Name
Dr. Reza Ronaldo, MM, CGI, APAI, CIIB, ANZIIF (Senior Associate), CIP,
CRMP, CRGP,. CHRP, CCIP., AIIS., FIIS.
Editor:
Name

Cover Design:
Name

Source:
Link

Layout:
Name

Proofreader:
Name

Size:
Total pages of title, total pages of manuscript, Size: 14x20 cm
ISBN :
No ISBN

First Printing:
March 2024

Copyright 2024, By the Author

Contents beyond the responsibility of
the printing press
Copyright © 2024 by Publisher
All Rights Reserved

All rights reserved Translating, photocopying,

or reproducing part or all of this book is strictly
prohibited.
without written permission from the Publisher.
 WORDS OF WELCOME

Bismillahirrahmanirrahim,
Assalamu'alaikum warahmatullahi wabarakatuh,

As a Professor at Raden Intan Lampung State Islamic University, I

am honored and proud to be able to give a speech on this valuable
occasion. The launch of the book "Risk Management and
Insurance for Students" is not only a personal achievement for
Reza Ronaldo but also a step forward for the world of education
and the practice of risk management and insurance in the country.

Reza Ronaldo, a lecturer and insurance practitioner with more

than 30 years of experience in the Indonesian insurance industry,
has poured his knowledge, experience, and valuable insights into
this book. This work is an important scholarly contribution for
students, academics, and practitioners, providing a
comprehensive guide to the concepts, theories, and practical
applications in risk management and insurance.

This book not only presents the theories and basic concepts of risk
management and insurance but also integrates case studies and
real experiences from the industry, which makes it an invaluable
reference for anyone who wants to understand and apply risk
management and insurance in daily practice.

v
I believe that the presence of this book will make a significant
contribution to the development of literature in the field of risk
management and insurance in Indonesia. This book is expected to
add knowledge that can improve the quality of education and
practice in the field of risk management and insurance, and
strengthen the foundation for future policy development and
innovation.

Therefore, I invite all students and the public to support and

promote this book so that the knowledge it contains can be
accessed by a wider audience, helping to create a risk
management and insurance ecosystem in Indonesia.

Finally, I congratulate Mr. Reza Ronaldo on the publication of the

book "Risk Management and Insurance for Students". May this
book be a good deed that is beneficial for all of us and the wider
community. Thank you.

Wassalamu'alaikum warahmatullahi wabarakatuh.

Prof. Dr. Tulus Suryanto, MM, CA, CFA, CERA, ACPA.

Dean of the Faculty of Economics and Islamic Business
State Islamic University Raden Intan Lampung

vi
 WORDS OF WELCOME

Dr. Yaudil Hery, ST, MT.

President Director of PT Jasa Cipta Rembaka

Assalamualaikum wr. wb.

Peace be upon us all,

It is an honor and privilege for me, Dr. Yaudil Hery, ST, MT, as the
President Director of PT Jasa Cipta Rembaka Reinsurance
Brokers, to give opening remarks at the launch of the "Risk
Management and Insurance for Students" textbook. This is a very
meaningful moment, not only for us as sponsors, but also for the
world of education and the insurance industry in Indonesia.

Education is the main pillar in building the character and skills of

quality human resources. In this era of uncertainty, a solid
understanding of risk management and insurance is crucial.
Through this textbook, we hope that students can gain a
comprehensive and applicable knowledge of risk management
and insurance, which they will apply in their future professional
lives.

PT Jasa Cipta Rembaka, as a company engaged in the field of

Reinsurance Brokerage as well as a Reinsurance Consultant,
vii
understands the importance of education on risk management
and insurance. Therefore, we are very proud to be able to
contribute and be part of the publication of this textbook. We
believe that an investment in education is an investment in a
brighter future.

This textbook "Risk Management and Insurance for Students" is

compiled by experts in the field, which not only presents theories
and concepts, but also actual case studies and practical
applications of risk management and insurance. We hope that this
book will be a valuable reference and can improve the quality of
learning and student mastery of risk management and insurance.
Finally, I would like to congratulate Dr. Reza Ronaldo, MM, and all
those who have been involved in the writing and publication of
this book. Hopefully, our joint efforts can make a significant
contribution to the development of education and the insurance
industry in Indonesia.

Thank you for your attention and support to continue to do

literacy. Let us continue to work together and contribute to a
better future of the Insurance Industry.

Wassalamu'alaikum warahmatullahi wabarakatuh.

viii
 FOREWORD

Best wishes for good health to our dear readers.

The book "Risk Management and Insurance for
Students" is a comprehensive guide designed to provide
an understanding of the concept of risk management and
the important role of insurance in minimizing the
negative impact and protecting against various risks
faced in carrying out various individual and
organizational activities.
Amidst continuous change in a complex
globalized world, risk has become an integral part of
every aspect of life. From accidents and natural disasters
to financial and business risks, the challenges of
identifying, analyzing and managing risk are increasing.
This book is intended for students and the
general public who are interested in understanding the
concepts of risk management and insurance, to
professionals who want to deepen their knowledge of
risk management and the dynamic insurance industry. In
this book, you will be introduced to the basics of risk
management, including risk identification methods, risk

ix
impact assessment, and effective mitigation strategies.
We will also discuss the important role
insurance plays in helping us protect our assets, health
and financial future. Of course, the journey through this
topic will be inseparable from technological
developments and innovations in the insurance industry.
This book discusses the history of risk
management since ancient times, starting to develop in
the industrial revolution era to become an important
discipline in modern times. The author includes several
case studies that will be an important lesson for students
and the public to know how large companies are
negatively affected by a risk and become bankrupt
because they ignore the important thing, namely the
management of enterprise risk management (ERM) and
how technology and finance have influenced a more
sophisticated and responsive way of managing risk,
where insurance is part of the transfer of risk.
The author hopes that this book will be able to
provide valuable knowledge and in-depth views on risk
management and insurance to students and dear readers,
and encourage you to take wise steps in protecting

x
yourself and valuable assets from unexpected risks.
Finally, I would like to thank all those who have
contributed to the making of this book, as well as
greetings to the readers who have provided support and
encouragement. Hopefully it can provide benefits and
insights for students and all of you. Happy reading!

Greetings,

Reza Ronaldo
Lecturer of STEBI Lampung, Indonesia

xi
 Table of Contents
DISCLOSURE ...................................................................................................... 5
FOREWORD........................................................................................................ 9
Table of Contents ............................................................................................ 12
CHAPTER 1. INTRODUCTION TO RISK MANAGEMENT ................................. 1
1.1 History of Risk Management .......................................................... 3
1.2 The Development of Modern Century Risk Management. ......... 19
1.3 Development of Risk Management in Indonesia ........................ 21
1.4. Summary. ............................................................................................. 27
Exercise....................................................................................................... 29
Multiple choice questions: ........................................................................ 30
CHAPTER II. UNCERTAINTY & RISK THEORY .............................................. 35
2.1 Uncertainty and Risk. .................................................................... 35
2.2 Uncertainty and Risk Theory. ....................................................... 37
2.3 Definition of Risk. .......................................................................... 40
2.4 Difference between Uncertainty and Risk. .................................. 43
2.5 Definition of Perils and Hazards. .................................................. 46
2.6 Types and Types of Risk. ............................................................... 49
2.7 Risk Components. .......................................................................... 53
2.8 Definition of Risk Management. ................................................... 55
2.9 Importance of Risk Management. ................................................ 60
2.10 Relevance for Students. ............................................................ 63
2.11 Duties and Functions of the Risk Manager. ............................. 66
Practice Essay Questions........................................................................... 74

xii
 Multiple Choice Problem Exercise. ........................................................... 74
CHAPTER III. INSURANCE .............................................................................. 78
3.1 Definition of Insurance. ................................................................. 80
3.2 Insurance Principles. ..................................................................... 86
3.3 History of Insurance. ..................................................................... 95
3.4 History of Insurance Companies in Indonesia. ............................. 97
3.5 Insurance Law in Indonesia. ....................................................... 100
3.6 General Insurance. ....................................................................... 103
3.7 Life Insurance............................................................................... 106
3.8 Compulsory Insurance................................................................. 108
3.9 Reinsurance. ................................................................................. 110
3.10. Global Insurance Development. ...................................................... 112
3.11. The Future and Challenges of Insurance in Indonesia. ........ 117
Exercises and Group Assignments. .......................................................... 122
CHAPTER IV. RISK MANAGEMENT PROCESS ............................................. 123
4.1 Risk Identification............................................................................... 123
4.2 Risk Analysis. ..................................................................................... 125
4.3 Risk Evaluation. .................................................................................. 128
4.4 Risk Management. .............................................................................. 131
4.5 Monitoring and Control. ..................................................................... 134
Summary. .................................................................................................. 137
Practice Essay Questions......................................................................... 139
Practice multiple choice questions......................................................... 140
CHAPTER V. RISK MANAGEMENT TOOLS AND TECHNIQUES ................. 145
CHAPTER VI. CASE STUDY ........................................................................... 150

xiii
 6.1 Silicon Valley Bank (SVB) Case Study. ....................................... 150
6.2 Diamond Offshore (OilCo) Case Study. ...................................... 154
6.3 Case Study of PT Wanaartha Life. ..................................................... 158
Summary. .................................................................................................. 162
Practice Essay Questions........................................................................... 164
CHAPTER VII. ETHICS & RESPONSIBILITY ................................................. 165
IN RISK MANAGEMENT ................................................................................ 165
7.1 The Role of Ethics in Risk Management. .................................... 165
7.2 Ethical Decision Making in Risk Management .......................... 165
7.3 Social Responsibility in Risk Management. ............................... 166
7.4 Ethical Principles in Risk Management...................................... 166
7.5 Maintaining Reputation and Trust. ............................................ 167
Group Assignment. .................................................................................. 168
CHAPTER VIII. CONCLUSIONS ...................................................................... 169
Bibliography................................................................................................... 187

xiv
 CHAPTER 1. INTRODUCTION TO RISK
MANAGEMENT

Introduction to Risk Management is an initial section

that aims to provide readers with an overview and basic
understanding of the concepts of risk and risk management.
Risk management is a systematic approach that aims to
identify, analyze, measure, and manage risks in order to
achieve the desired goals.
In today's environment of uncertainty and
complexity, risk management is becoming increasingly
important for individuals and organizations. Unforeseen
events, market changes, and new threats can have a major
impact on an entity's overall performance and viability,
making the introduction of risk management a crucial first
step in facing future challenges more confidently and
responsively.
The purpose of risk management is to identify
possible risks, measure the level of risk, and plan
appropriate mitigation strategies and actions to reduce or
manage any negative impacts. Risk management covers
various aspects of life and business, including the financial

Risk Management and Insurance 1

sector, industry, health, environment, technology, and even
in personal decision-making. In an ever-changing and
unpredictable world, the ability to manage risk well is key
to achieving long-term success and sustainability.
In practice, risk management involves steps such as
identifying potential risks, evaluating the likelihood of risks
occurring, measuring the impact of possible risks, and
planning mitigation strategies to deal with them. The use of
data analysis tools and techniques, risk modeling, and risk
management software can help organizations identify and
manage risks efficiently.
In addition, risk management also includes effective
communication to stakeholders to ensure a common
understanding of risks and the steps taken to manage risks.
As the world becomes more complex and globally
connected, risk management faces new challenges.
Technological change, geopolitics, climate change, and
pandemics are some examples of events that have
highlighted the importance of risk management. It has
become essential for organizations to have an adaptive and
innovative approach to dealing with evolving risks.
Understanding and implementing risk management

Risk Management and Insurance 2

is key to ensuring organizational sustainability and success
amidst ongoing uncertainty and change. This book provides
a comprehensive guide to risk management, including tools
and techniques, as well as case studies.
Having a deep understanding of risk management,
students as future leaders are better prepared to face the
challenges of an ever-changing business world and adapt
with confidence and sincerity.

1.1 History of Risk Management

The development and evolution of the concept of risk
management, from the Ancient Egyptian period to the early
20th century, is as follows:
a) The Beginning of the Ancient Period.
Risk management has been practiced in the world for
thousands of years. The Ancient Egyptians, Babylonians
and Romans had something resembling simple risk
management practices to protect wealth and assets. Back
then, they had emergency funds to protect trade from
maritime risks and crop losses. In Ancient Egyptian,
Roman and Babylonian times, there were some activities
that resembled risk management practices. Although the

Risk Management and Insurance 3

 concept of risk management as we know it today did not
exist, ancient civilizations had practices that were similar
to certain aspects of risk management. Here are some
examples of activities that resemble risk management
during those times:
1. Trade Insurance. In Ancient Egypt, merchants and
seafarers used simple insurance to protect their goods.
They formed associations or groups to share risks and
prevent losses due to disasters or theft. This practice is
similar to the basic concept of insurance which
involves transferring risk from the risk owner to the
insurance company by paying a sum of money called
"premium".
2. Leadership Practices. In Babylonian and Roman
times, Kings and leaders practiced planning and
decision-making oriented towards reducing risk and
uncertainty. They sought to meet challenges such as
natural disasters, wars and crises with effective
strategies to reduce the negative impact on the people
and territories they ruled.
3. Agricultural Practices. In Ancient Egypt and Rome,
agriculture was a major sector of the economy.

Risk Management and Insurance 4

 Farmers employed practices to reduce risk by
planting other crops to avoid rice crop failure due to
climate change or pest outbreaks.
4. Data Collection. At the same time, authorities and
groups are active in collecting data and making
observations to identify possible patterns of risk and
uncertainty. Data on seasons, weather and natural
phenomena were used to plan appropriate actions to
deal with potential risks. History has proven that
many writings and images of the past are recorded in
various media; stones, inscriptions, caves and so on.

Although the concept of risk management in ancient

times was not as comprehensive as what we know today,
the practices reflected human awareness of the
importance of protecting ourselves from uncertainty and
dealing with risks in order to achieve goals and
sustainability. The development of comprehensive risk
management occurred in modern times with advances in
economics, commerce and business activities.
b) The Middle Ages and the Imperial Period.
In medieval times, along with the development of trade

Risk Management and Insurance 5

and large trading companies, the practice of risk
management grew. During the Imperial period in Europe,
merchants and sailors experienced high risks in
undertaking long-distance expeditions and trade.
Therefore, they formed societies and associations to
share the risks. This practice became the forerunner of
the modern insurance system. In the Middle Ages and the
European Empire, there were several activities that
resembled risk management practices, especially in the
trade and marine sectors. Although the modern concept
of risk management was not fully formed, these practices
reflected an awareness of the importance of dealing with
uncertainty and protecting wealth and assets.

Here are some examples of activities that resemble risk

management during the period:

1. Maritime Trade. During the Middle Ages and the

European Empire, maritime trade was an important
economic sector. Merchants and sailors faced high
risks on long-distance voyages due to the possibility of
natural disasters, pirate attacks, and losses en route.
To deal with these risks, merchants and sailors formed
trade associations, such as the Hanseatic League,

Risk Management and Insurance 6

 which provided collective protection and shared risks.
2. Ship Insurance: As maritime trade developed, the
practice of ship insurance began to emerge. Ships and
their cargoes were insured to protect against the risk
of loss or damage due to marine disasters, robbery
and other accidents. The concept of ship insurance
reflects an attempt to transfer risk and prevent
bankruptcy due to large losses.
3. Agricultural Practices. At that time, agriculture was a
major sector in the economy. Farmers faced various
risks from weather changes, crop disease outbreaks
and other disruptions. They developed practices such
as crop diversification and crop storage to reduce the
risk of famine and economic loss.
4. Leadership and Security Practices. The rulers and
leaders of that time also did planning and decision-
making oriented towards reducing/mitigating risks
from uncertainty. They faced risks from enemy
attacks, rebellions, and natural disasters. War
strategies, defense strategies, and security planning
were used to deal with risks.
5. Health Practices. In the face of risks from infectious

Risk Management and Insurance 7

 diseases, epidemics, and health, societies of the era
developed health and medical practices that were
oriented towards the prevention and treatment of
disease.

Although these activities did not fully follow the formal

structure and approach of modern risk management,
they reflected the human endeavor of the time to deal
with uncertainty and protect themselves from risks.
Further development of modern risk management took
place in the modern era with advances in science,
technology and business practices.
c) The Industrial Revolution and Modern Insurance. In
the 18th and 19th centuries, the Industrial Revolution
brought significant changes in business and industry. The
development of technology, global trade, and
transportation led to increased risks in various sectors.
This is when the modern insurance industry began to
develop. The first insurance company was established,
Lloyd's of London in England in 1688, offering ship and
cargo insurance. During this period, risk management
practices became more formalized and structured, with

Risk Management and Insurance 8

 insurance companies providing insurance policies to
protect against the risk of loss. During the Industrial
Revolution and the development of the modern
insurance industry, there were several other activities
that resembled risk management practices. Some of them
are:
1. Establishment of Insurance Companies. After Lloyd's
of London in the UK, various other countries
established insurance companies that provide
insurance agreements/policies for various types of
risks, such as ship insurance, fire insurance, and life
insurance. With the growing insurance industry,
individuals and companies can transfer risks to
insurance companies as a mitigation measure.

2. Actuarial and Underwriters Development. In the

development of the insurance industry, the profession
of underwriters and actuaries is becoming increasingly
important. Actuaries are statisticians and
mathematicians who are able to measure and analyze
risks and calculate reserves for long-term risks, while
underwriters determine the level of premiums in

Risk Management and Insurance 9

 accordance with the risks faced and whether or not the
risk is covered by the insurance company. The role of
actuaries and underwriters in the insurance industry
ensures fairness and financial sustainability for
insurance companies.
3. Insurance Policy Drafting. The insurance industry
develops insurance policies that contain terms and
conditions governing insurance coverage, premiums,
claim payments, and others. The preparation of this
insurance policy is an important step in
communicating the risks covered and the rights and
obligations of the parties involved.
4. Financial Management Practices. The development
of the interrelated insurance and banking industries
has also led to the development of more complex
financial management practices, such as credit risk
management, investment management, and liquidity
management. These practices help insurance
companies manage financial risks and ensure long-
term financial stability.
5. Risk Analysis and Evaluation. Insurance companies
use increasingly sophisticated risk analysis techniques

Risk Management and Insurance 10

 to assess the risks faced and determine appropriate
premiums. They also conduct periodic risk evaluations
to ensure insurance policies remain relevant and in
accordance with existing market conditions and risks.
6. Business Planning. Risk management is becoming an
important part of business planning. Insurance
companies and others integrate risk analysis in their
strategic planning to identify opportunities and threats
that might affect future business success.
Overall, the Industrial Revolution and the development
of the modern insurance industry have contributed
greatly to the formalization and structuring of risk
management practices. These activities reflect human
efforts to confront and manage risk in an increasingly
complex and globally connected business and industrial
environment. The development of risk management
continues today with advances in technology and
increasingly sophisticated data analysis.
d) 20th Century; Corporate and Financial Risk
Management. In the 20th century, risk management
experienced rapid development, particularly in two main
areas, namely Corporate Risk Management and Financial

Risk Management and Insurance 11

Risk Management. The development of risk management
was triggered by global events such as the World Wars
and significant financial events, as well as the emergence
of technological advancements and data analytics that
made a huge impact on how risk is managed. Here are
some aspects that cover the advancements in Corporate
Risk Management and Financial Risk Management in the
20th century, namely Corporate Risk Management:
1. Enterprise Risk Management (ERM). The birth of the
ERM concept was a major breakthrough in corporate
risk management. ERM is a holistic and integrated
approach to managing all types of risks faced by
companies, including operational risk, financial risk,
strategic risk, compliance risk, and reputational risk.
ERM assists companies in identifying interconnected
risks and managing risks efficiently and effectively.
Enterprise Risk Management (ERM) is a holistic and
integrated approach to managing all risks faced by an
organization. The ERM approach is designed to help
organizations identify, assess, and manage risks that
may affect the achievement of the Company or
Organization's objectives. ERM focuses on managing

Risk Management and Insurance 12

risks in a strategic and data-driven manner, so that
organizations can better deal with uncertainty and
increase success in achieving their goals. Some key
elements of Enterprise Risk Management, as follows:
a) Risk Identification. The first stage in ERM is to
identify the risks that the organization may face.
Risks can come from various sources, operational
risk, financial risk, legal risk, reputation risk, and
so on. The risk identification process should cover
all parts and aspects of the organization.
b) Risk Assessment. Once the risks have been
identified, the next step is to assess their impact
and probability of occurrence. Risk assessment
helps organizations identify the most critical risks
and prioritize risk management efforts.
c) Risk Management. Once risks have been
identified and assessed, the next step is to design a
risk management strategy. Risk management
includes various actions to reduce, or avoid, the
transfer of risk, as well as making risk decisions
that can be accepted or rejected by the
organization.

Risk Management and Insurance 13

d) Monitoring and Surveillance: ERM is an ongoing
process that requires continuous monitoring and
oversight of identified risks. Organizations must
continuously track changes in the business
environment and adapt risk management
strategies as needed.
e) Involvement and Responsibility: ERM involves all
levels of management and employees in the
organization. Each individual has the
responsibility of identifying and managing risks
within their respective areas of responsibility.
f) Integration in Business Processes: ERM is not just
a separate function, but should be integrated
throughout the organization's business processes.
ERM processes should be connected to the
organization's strategic planning, budgeting, and
decision-making processes.

The main objective of ERM is to increase the

organization's resilience to uncertainty and help the
organization achieve corporate objectives more
effectively. With a robust ERM, organizations will be

Risk Management and Insurance 14

able to face complex risk challenges in the ever-
changing business world.

a) Stakeholder Engagement.
Corporate risk management involves stakeholders,
including employees, customers, investors,
governments and communities. This engagement
helps identify risks that are relevant to various
stakeholders and seek more inclusive and
sustainable solutions.
b) Policy and Procedure Development.
Companies are increasingly recognizing the
importance of having clear policies and procedures
related to risk management. These policies include
procedures for identifying risks, assessing risks,
managing risks, and reporting risks to management
and stakeholders.
c) Supervision and Corporate Governance. The
development of corporate risk management has
also led to better corporate governance. Strong
oversight and transparency in risk reporting are
important in maintaining the integrity and

Risk Management and Insurance 15

 sustainability of the company.

2. Financial Risk Management.

The history and development of financial risk
management has deep roots in the development of
finance, business and economics. Financial risk
management has undergone significant development
along with changes in financial complexity and global
business dynamics. Today, financial risk management
is an integral part of modern business strategy and
corporate governance, aiming to protect value and
achieve long-term sustainability. Some of the financial
risk management include the following:
• Investment Risk Management. Companies and
financial institutions are increasingly using
portfolio analysis and diversification techniques to
manage investment risk and optimize margins.
• Credit Risk Management. The financial industry is
increasingly focusing on credit risk to reduce non-
performing loans and minimize the likelihood of
borrower default.
• Derivatives and Financial Instruments. The

Risk Management and Insurance 16

 development of financial instruments such as
futures contracts helps companies protect against
price and currency fluctuations, and provides a
more effective hedging strategy.
• Financial Regulation. In the 20th century, the
development of financial risk management was
influenced by increasingly complex and stringent
financial regulations. Regulators introduced
requirements and conditions to manage risk more
effectively. Every country imposes international
regulations and standards on financial services
businesses.
e) Contemporary Era and Risk Complexity. In the
contemporary era, risk management is increasingly
complex due to the variety of risk factors that are
increasingly varied and have a global impact.
Globalization, digital technology, climate change, strict
regulations, and cybersecurity threats are some
examples of factors that cause risk complexity. Risk
management today does not only focus on financial
aspects, but includes social, environmental, and ethical
aspects.

Risk Management and Insurance 17

 Developments in Corporate and Financial Risk
Management in the 20th century have made major
contributions in dealing with increasingly complex risks
and assisting companies and financial institutions in
achieving long-term goals and success. These risk
management practices continue to evolve and become
more important in the contemporary era with the advent of
technology and ever-changing uncertainties.
As information technology and data analytics have
evolved, risk management has become more sophisticated
and targeted. Today, all organizations use data- and
technology-driven approaches to identify risks, measure
their impact, and design appropriate mitigation strategies.
The history of risk management shows how risk
management practices have become an important part of
human life and business.
From the simple practices of ancient times to the
complex and data-driven approaches of the modern era, risk
management continues to evolve to meet the challenges and
uncertainties of the future. The history of risk management
spans multiple civilizations and epochs, so no one person or

Risk Management and Insurance 18

 company can be identified as the first to introduce the
concept of risk management.
From various literature that has been written by
experts, it is known that the practice of risk management
has existed since ancient times and has evolved over time in
various cultures and societies.

1.2 The Development of Modern Century Risk Management.

There are several organizations or institutions that
can be considered as pioneers or drivers in the development
of more structured and organized risk management
practices. Here are some of them:
a. The Institute of Risk Management (IRM). IRM is an
international professional organization established in
1986 in the UK. IRM aims to develop and promote
effective and ethical risk management practices. They
provide certification and training in risk management,
and organize seminars, conferences and other activities
to advance the understanding and application of risk
management.
b. The Risk and Insurance Management Society (RIMS).
RIMS is a professional organization founded in 1950 in
the United States. RIMS focuses on the practice of risk
Risk Management and Insurance 19
 management and insurance, providing certification and
educational programs for risk management
professionals. RIMS is also a forum for practitioners to
share knowledge and experience in managing risk in
various industries.
c. The International Organization for Standardization
(ISO). ISO is an international organization that develops
international standards for various fields, including risk
management. The ISO 31000:2018 standard is an
international standard for risk management that
provides guidance and principles for identifying,
assessing, and managing risks in various organizations
and sectors.
d. The Committee of Sponsoring Organizations of the
Treadway Commission (COSO). COSO is a committee
that focuses on risk management and internal control.
COSO publishes the Enterprise Risk Management (ERM)
which provides comprehensive guidance on corporate
risk management. The COSO ERM Framework has been
widely recognized as an important guide for
organizations in integrating risk management in
business processes.

Risk Management and Insurance 20

e. The Basel Committee on Banking Supervision
(BCBS). The BCBS is a committee established by the Bank
for International Settlements (BIS) that focuses on
developing standards and guidelines for the banking
sector. One of the major contributions of the BIS is the
Basel Accord, which is a set of regulations and standards
for banking risk management. The Basel Accord has
provided important guidance for banking institutions in
measuring and managing risk.
The above organizations and institutions have made
important contributions to advancing the practice of risk
management in the modern century by providing guidance,
standards, and educational resources that have helped
elevate risk management as an integral part of
organizational success and sustainability in uncertain and
complex times.
1.3 Development of Risk Management in Indonesia
Along with economic development and
globalization, risk management has become an integral part
of the business environment and life in Indonesia. Business
risks, financial risks, environmental risks, political risks,
and other risks can affect company performance, economic

Risk Management and Insurance 21

stability, and welfare.

In the beginning, awareness of risk management in

Indonesia was still relatively low, and risk management
practices tended to be reactive rather than proactive. The
development of risk management in Indonesia has
progressed rapidly along with the awareness of the
importance of risk management in achieving business
objectives and maintaining financial stability. The
Indonesian government encourages companies to
implement risk management by issuing regulations and
guidelines for implementing risk management. The
Financial Services Authority (OJK) is an independent
institution established under Law No. 21/2011. OJK was
born on July 16, 2012 with the aim of organizing a system of
regulation and supervision in the financial services sector.
The history of the establishment of OJK was born from
efforts to present a regulatory and supervisory system that
is fair, orderly, transparent, and accountable in financial
services activities in Indonesia.
OJK has a function to maintain the stability of the
financial sector, protect the interests of consumers and the
public, and realize a financial system that grows sustainable

Risk Management and Insurance 22

and stable. With the OJK, it is expected that the financial
services sector can run fairly, transparently, regularly, and
accountably, and can maintain stability in the financial
sector.
The Financial Services Authority (OJK) as the
financial regulator in Indonesia has issued various
regulations related to risk management in the financial
sector. Here are some of the risk management regulations in
Indonesia, among others:
a) OJK Regulation (POJK) Number 17/POJK.03/2014 on the
Implementation of Risk Management for Commercial
Banks. This regulation covers the basic principles of risk
management, risk management governance, risk
identification, risk assessment, risk monitoring, and risk
management in bank supervision.

b) POJK No. 05/POJK.05/2015 on Risk Management

Systems (SMR) in Financial Services Institutions. This
regulation covers the requirements for SMR in financial
services institutions, which include banks, insurance
companies, finance companies, and securities companies.
This regulation requires financial services institutions to

Risk Management and Insurance 23

 have an effective risk management system that is in line
with their business characteristics.
c) POJK Number 37/POJK.03/2016 concerning Risk
Management Governance for Insurance Companies. This
regulation regulates risk management governance for
insurance companies in Indonesia. Insurance companies
must have a good and effective risk management system
in identifying, measuring, and managing risks in the
insurance business.
d) POJK Number 40/POJK.05/2015 regarding the
Implementation of Risk Management for Securities
Companies. This regulation regulates the
implementation of risk management for securities
companies (Brokers, Dealers, and Underwriters) in
Indonesia. Securities companies must have a risk
management system that is adequate and appropriate to
their activities in the capital market industry.
e) POJK Number 44/POJK.05/2020 concerning the
Implementation of Risk Management for Nonbank
Financial Services Institutions.

Risk Management and Insurance 24

 The risk management regulations issued by OJK aim
to encourage financial institutions in Indonesia to adopt risk
management practices and integrate risk management as
part of their operations. With these regulations, it is
expected that risks in the financial sector can be better
managed and help improve the resilience and stability of
Indonesia's financial system.

Indonesia adopted the international standard, ISO

31000, to integrate risk management in various sectors.
Awareness about risk management is increasing among
companies and institutions in Indonesia. Professionals and
executives realize the importance of risk management to
protect corporate assets, improve performance, and
maintain reputation.

Risk Management and Insurance 25

 Education and training in risk management is also
increasingly available, enabling students and practitioners
to acquire the knowledge and skills necessary to manage
risk more effectively.
The insurance industry in Indonesia also contributes
to the development of risk management. Insurance is one
form of risk management tool commonly used by companies
and individuals. The growth of the insurance industry in
Indonesia drives awareness of the importance of protecting
oneself from financial and business risks.
The development of information technology and
analytics has strengthened risk management capabilities in
Indonesia. The use of data analysis tools and techniques
helps companies to identify risks more accurately and
design more appropriate mitigation strategies.
Large companies in Indonesia are increasingly
recognizing the importance of corporate risk management
in the face of business uncertainty and complexity. Many
companies have established internal risk management
functions (Risk Management Division), conducted Risk
Manager training and established the position of Risk
Management Director to coordinate and manage risks

Risk Management and Insurance 26

 across the organization.
The development of risk management in Indonesia
continues and is becoming an increasingly important part of
business operations and decision-making. Better awareness
and understanding of risk management has helped
organizations and companies to more effectively deal with
challenges and uncertainties, and achieve long-term
success.

1.4. Summary.
A summary of the history of risk management from
the Ancient period to the 20th Century and the
Contemporary Era:
1) Since ancient times, humans have realized the
importance of protecting themselves from risks. Ancient
civilizations such as the Egyptians, Babylonians and
Romans developed simple insurance systems to protect
royal assets.
2) During the Middle Ages in Europe, merchants and
sailors formed societies and associations to share risks
on merchant voyages. This practice became the
forerunner of the modern insurance system.

Risk Management and Insurance 27

3) In the 17th century, the concept of insurance began to
develop in Europe with the emergence of the first
marine insurance companies, such as Lloyd's of London.
4) In the 19th century, along with the industrial revolution
and the development of trade, risk management became
increasingly necessary in industry and business.
5) In the late 19th and early 20th centuries, insurance and
risk management became more structured with the
establishment of insurance agencies and risk societies.
6) Contemporary Era. Since the mid-20th century, risk
management has increasingly become a major concern
in businesses and organizations. Global events such as
World War I and World War II raised awareness of the
importance of risk management to protect assets and
maintain business continuity.

In the contemporary era, information technology has

provided major advances in risk management. Data analysis
methods and tools help organizations identify and measure
risks more accurately.
Financial institutions and organizations are
increasingly aware of the need for integrated and

Risk Management and Insurance 28

comprehensive risk management. The emergence of the
ERM (Enterprise Risk Management) concept helps integrate
risk management with corporate strategy and operations.
In the contemporary era, risk management is not
only associated with business and finance directorates, but
has become important in the environmental, health, and
technology sectors. Technological developments, as well as
awareness of the importance of risk management, have
helped face the growing challenges and uncertainties in a
complex global environment. Risk management is becoming
a necessary practice to protect value, achieve goals, and
create sustainability for organizations around the world.

Exercise.
To improve your knowledge and insight into the material,
answer the following questions:
(a) Summarize the history of Risk Management in the world
and in Indonesia!
(b) In what era did risk management start to develop and
why?

Risk Management and Insurance 29

(c) In what era are you interested in the existence of Risk
Management? Why?
(d) Name the organizations that pioneered the use of risk
management and explain what these organizations did!
(e) Why do you think Risk Management is important?

Multiple choice questions:

1. When did the practice of insurance first appear in
history?
a. Ancient Egypt.
b. Roman times.
c. Babylonian Age.
d. The Age of the Industrial Revolution.
2. What was the purpose of risk management in imperial
Europe?
a. Reduce risk in maritime trade.
b. Facing the challenges of war and natural disasters.
c. Protect traders' wealth and assets.
d. All answers are correct.
3. Where the insurance company was first established,
that provides ship and cargo insurance?
a. Germany.

Risk Management and Insurance 30

 b. English.
c. United States.
d. France.
4. What is a risk management concept that focuses on
manage all types of risks faced by the company?
a. Corporate Risk Management.
b. Financial Risk Management.
c. Operational Risk Management.
d. Strategic Risk Management.
5. Profession that uses statistics and mathematics to
measure & analyze risks in industries
insurance is:
a. Actuarial.
b. Risk Analyst.
c. Risk Manager.
d. Insurance Supervisor.
6. What are the main concerns of Risk Management
in ancient times?
a. Financial risk.
b. Risk of war.
c. Health risks.
d. Climate risk.

Risk Management and Insurance 31

7. The first insurance agency to provide policies
insurance to protect against vessel and cargo risks
is:
a. AIG (American International Group).
b. Lloyd's of London.
c. Allianz.
d. Prudential.
8. In ancient times, what were the risk management
practices
used by merchants and sailors to share
risk and prevent losses from marine disasters or
theft?
a. Health insurance.
b. Life insurance.
c. Ship insurance.
d. Property insurance.
9. What is the purpose of using analytical tools and
techniques
data in modern risk management?
a. Identify relevant risks.
b. Estimating the probability of risk occurrence.
c. Assist in managing risk efficiently.

Risk Management and Insurance 32

 d. All answers are correct.
10. In modern risk management, a holistic approach
and integrated that manages all types of risks
called:
a. Enterprise Risk Management (ERM).
b. Risk Assessment.
c. Risk Mitigation.
d. Risk Monitoring.
11. Along with the development of the Industrial Revolution,
the rise of the modern insurance industry helped
company in:
a. Reduce financial losses.
b. Increased operational risk.
c. Facing climate change.
d. All answers are wrong.

12. Development of financial instruments such as contracts

futures and options help companies in:
a. Facing the risk of war.
b. Reduce financial risk.
c. Assessing climate risks.
d. All answers are correct.

Risk Management and Insurance 33

 The following are the answer keys to the 12 multiple-choice
questions:
1. Answer: a. Ancient Egyptian period.
2. Answer: b. Facing war & natural disasters.
3. Answer: b. England.
4. Answer: a. Corporate Risk Management
5. Answer: a. Actuarial.
6. Answer: b. War risk.
7. Answer: b. Lloyd's of London.
8. Answer: c. Ship insurance.
9. Answer: d. All answers are correct.
10. Answer: a. Enterprise Risk Management (ERM).
11. Answer: a. Reduce financial losses
12. Answer: b. Reduce financial risk.

Risk Management and Insurance 34

CHAPTER II. UNCERTAINTY & RISK THEORY

2.1 Uncertainty and Risk.

Uncertainty refers to a condition where future
information or outcomes cannot be predicted or
ascertained with precision. In the context of risk
management, uncertainty is the inability to fully understand
or know what will happen in the future. Uncertainty is
natural in many situations, and the main challenge is how to
respond to it appropriately.
In the discipline of risk management, uncertainty
management is the main focus to help organizations or
individuals deal with challenges and opportunities that
cannot be predicted with certainty. The goal of uncertainty
management is to figure out the best way to reduce
uncertainty as much as possible and make the most
appropriate decision based on the information at hand.
Meanwhile, risk is the potential or possibility of an
event or situation that can have a negative or adverse
impact on the environment.

against a specific goal, project or activity. Risk involves

uncertainty, where there is a possibility of an undesirable

Risk Management and Insurance 35

outcome or loss that could occur. Risk can also be associated
with opportunity, which is the likelihood of a favorable
outcome.
Risk management involves the process of identifying,
analyzing, evaluating, and managing risks with the aim of
minimizing the negative impact of risks and maximizing
potential opportunities. At an organizational level, risk
management helps ensure that risks are identified early and
appropriate strategies are developed to mitigate their
negative impact.
It is important to understand the difference between
uncertainty and risk in the context of risk management.
Uncertainty is a situation where we do not know what will
happen, while Risk is the negative impact or potential loss
that can occur due to the uncertainty. Risk Management
aims to reduce risks arising from uncertainty in an effective
and efficient manner.

Risk Management and Insurance 36

2.2 Uncertainty and Risk Theory.
Some theories and literature related to Uncertainty
and Risk include:
a. "Judgement under Uncertainty: Heuristics and
Biases". Amos Tversky, Daniel Kahneman (1982). A
book that reveals how humans make decisions in
situations of uncertainty and how heuristics and biases
can affect the decision-making process.
b. "The Black Swan: The Impact of the Highly
Improbable". Nassim Nicholas Taleb. States that
predicted events are unlikely to happen, yet have a huge
and unexpected impact on the world. Taleb discusses
uncertainty, extreme risk, and the human tendency to
ignore the potential of rare events that can change
everything. This book challenges the conventional view
of risk management.
c. "Against the Gods: The Remarkable Story of Risk" by
Peter L. Bernstein: Bernstein reviews the history and
development of the concept of risk from a financial
perspective and illustrates how the understanding of risk
has influenced economic and investment decisions in
human history. A great reference book to know how

Risk Management and Insurance 37

 man's view of risk has evolved over time.
d. The book "Risk Society: Towards a New Modernity",
Ulrich Beck (1986). Discusses the emergence of a risk-
conscious society, where uncertainty and risk
increasingly affect human life in social and political
structures.
e. "Decision Theory: An Introduction to Dynamic
Programming and Sequential Decisions". Richard M.
Bellman: An article that discusses decision theory under
uncertainty with a dynamic programming approach.
Bellman explains that in decision making, leaders must
consider various scenarios to optimize outcomes in
uncertain situations.

f. "The Concept of Risk and Uncertainty". Frank H.

Knight: An article that reviews the difference between
risk and uncertainty. Knight asserts that risk can be
measured and predicted, while uncertainty is a condition
where probabilities and future outcomes cannot be
determined with certainty. This article laid the
foundation for the theory of risk management and
decision-making.
g. "Managing Risk and Uncertainty: A Strategic

Risk Management and Insurance 38

 Approach". David Hillson: A book that formulates a
strategic approach to dealing with and managing risk and
uncertainty. Hillson offers a practical framework for
identifying risks, developing risk response plans, and
integrating risk management into the decision-making
process.

h. "The Flaw of Averages: Why We Underestimate Risk in

the Face of Uncertainty". Sam L. Savage says that
leaders often rely on average success rates in decision-
making, but fail to account for uncertainty and read
variations in data. Savage reminded the importance of
distributing data thoroughly and planning appropriate
responses to address risks that may occur beyond
prediction.
i. "Managing Business Risk: A Practical Guide to
Protecting Your Business". Jonathan Reuvid: This
book provides practical guidance in dealing with the
various risks that businesses may face. Reuvid covers key
aspects of risk management, including operational risk,
financial risk, and reputational risk. This book is useful
for business owners and managers who want to protect
their business from the negative impact that uncertainty

Risk Management and Insurance 39

 and risk can have.

2.3 Definition of Risk.

All activities in daily life always contain risks,
whether we realize it or not that there are always risks in
human activities, starting from waking up, taking a shower,
going to work, going to college, going to the market, taking
a car, riding a motorcycle, bus, train, selling, trying, until the
time to go home to rest, all contain risks. One risk that is
certain is "death" but we all do not know, when is the time?
At home? In the office? On the road, or in the hospital
because of a certain disease.
The risk that often occurs and has a high probability
level is the Risk of Road Accidents. According to Police data
in 2022 quoted by the Ministry of Information, an average of
3 (three) people die every hour due to road accidents in
Indonesia. The data states that the high number of accidents
is caused by several things, namely: 61% of accidents are
caused by human factors, which are related to the ability
and character of the driver, 9% are caused by vehicle factors
(related to the fulfillment of roadworthy technical
requirements) and 30% are caused by infrastructure and

Risk Management and Insurance 40

environmental factors.
What is Risk? Risk is the uncertainty regarding the
outcome of an event or occurrence that may negatively
impact the goals or objectives to be achieved. Risks can
arise from a variety of sources such as economic changes,
regulatory changes, new technologies, or even human error.
The definition of risk varies depending on the context
and perspective of books, literature, articles, and expert
opinions. Here are some examples of risk definitions from
various sources:
1) In the book "Principles of Risk Management and
Insurance" by George E. Rejda (2017), "Risk is
uncertainty about the outcome of an event or activity,
and includes the possibility of loss or negative
impact."
2) In the article entitled "Defining Risk", Kenneth R. Foster
and Gordon G. MacKinney, Risk is defined as "an
undesirable event or uncertainty associated with a
specific objective, which may cause loss, accident,
damage, or interference in achieving that objective."
3) In the book "The Essentials of Risk Management", by
Michel Crouhy, Dan Galai, and Robert Mark (2014). "Risk

Risk Management and Insurance 41

 is the potential for losing something valuable, or the
potential for not achieving expected goals, due to
uncertainty about future events."
4) In the article "Risk Management in a Dynamic Society: A
Modeling Problem", Ragnar Lofstedt (2005). "Risk is the
combination of the likelihood of an event occurring
(probability) and its impact or consequences if the
event occurs."

5) In the Book: "Managing Business Risk: A Practical Guide

to Protecting Your Business". Jonathan Reuvid (2012).
"Risk is the chance or likelihood of an event occurring
that has the potential to affect an organization's
objectives or performance, either in a positive or
negative way."
It should be noted that the definition of risk can vary, and
there is no absolute and only correct definition of risk
because it contains both certain and uncertain risks.
Everyone knows that if a mountain erupts, it can pose a
negative risk, but not every occurrence or event of a
mountain eruption poses a bad risk. These definitions
reflect different perspectives and approaches to

Risk Management and Insurance 42

understanding risk. Sometimes, the definition of risk can be
tailored to specific contexts and industries, so it needs to be
well understood in each relevant situation.
2.4 The difference between uncertainty and risk.
There are still many assumptions that uncertainty
and risk are considered "the same", but they are different.
Uncertainty is often called Uncertainty, caused by imperfect
human knowledge. Meanwhile, Risk (Loss) is an undesirable
thing or event that can have a negative or detrimental
impact.
The level of uncertainty refers to the extent to which
humans have knowledge or information about a future
event or situation. The higher the level of uncertainty, the
more difficult it is to predict the outcome or consequences
of an event. Here are some general levels of uncertainty,
namely:
a) Risk is a measurable and manageable degree of
uncertainty. In the context of risk management, risks are
typically identified, measured and analyzed using
historical or statistical data to evaluate the likelihood of
an event occurring and its impact. Risk events often have
the possibility of both positive impacts (opportunities)

Risk Management and Insurance 43

 and negative impacts (threats).
b) Uncertainty refers to the degree of vagueness or lack of
information about an event or situation. Often we do not
have enough data or information to be able to accurately
predict. Uncertainty tends to be more difficult to measure
or predict than risk, due to the lack of data or a strong
statistical basis.
c) Critical Uncertainty. During a critical event, uncertainty
is very high and there is no information needed to make
a decision. This situation arises in emergency situations,
natural disasters, or other unexpected events where
resources and information are limited.
d) Ignorance. Ignorance refers to a situation where a
person is unaware of the potential risks that could occur.
This is the highest level of uncertainty, as there is no
knowledge of the risk or event.
a) Ambiguity. Ambiguity occurs when there is a lack of
clarity in the interpretation of the information or
situation obtained. Although there is information, there
are various interpretations or different interpretations
so that there is indecision in taking steps or actions.

Risk Management and Insurance 44

 It is important to understand the level of
uncertainty in various situations, as this understanding can
help us deal with risks and make informed decisions.
Effective risk management requires a clear assessment of
the level of uncertainty faced, so that appropriate mitigation
measures can be taken to reduce negative impacts so that
organizations and companies can take advantage of
opportunities that exist while still running and managing
risks prudently. The following table shows the difference
between uncertainty and risk;
Aspects Uncertainty Risk

Uncertainty describes not Risk is the possibility of

knowing the outcome or unintended loss and its impact
Definition
consequences of an event on a particular goal or
or occurrence. objective.
Related to the likelihood of
Cannot be predicted with
Nature something happening based on
certainty
analysis and evaluation.
Assess the probability of an
Main Regarding ignorance of
event occurring and the impact
Focus the final result
if it does occur

Risk Management and Insurance 45

 Will a product be
accepted by the market
Risks of Investing in the Stock
Example or not?
Market
Will an event be
successful or not?

Dealt with by implementing

Handling Relying on Assumptions, Risk Management Strategies
Risk Estimates or Scenarios such as Mitigation, Transfer of
Risk.
Source: processed from various sources.

2.5 Definition of Perils and Hazards.

Perils refer to events or circumstances that can
cause loss or damage to property, people, or the
environment. Perils can be natural events, such as
earthquakes, floods, storms, forest fires, or man-made
events, such as industrial accidents, explosions, or acts of
terrorism. Perils are situations that can cause risks to arise
and harm the parties involved. Hazard refers to the
potential or source of perils.

In the context of risk management, hazard refers to

a condition or event that has the potential to cause risk or
harm. Hazards can be physical, chemical, biological,
psychological, or associated with other factors that cause

Risk Management and Insurance 46

dangerous or high-risk situations. There are 5 (five) types
of hazards;

a) Physical Hazard is a type of hazard associated with the

physical condition or properties of an object, substance,
or environment that can cause injury or damage.
Examples include fire hazards, explosions, radiation,
sharp objects, and extreme environmental conditions
such as floods, earthquakes, or storms.

b) Moral Hazard is a term used in the context of risk

management and insurance to describe the changed
behavior or potential irresponsible behavior of an
insured party once they have insurance protection or
financial security. Specifically, Moral Hazard occurs
when a person or entity has insurance or financial
protection, which causes them to feel more protected or
risk-free for their own actions. As a result, individuals or
organizations tend to take greater risks or engage in
riskier behavior, knowing that their actions will be
covered by the insurer. An example of Moral Hazard in
the context of health insurance is when an insured
person tends to visit the doctor more often or utilize
health services because they are insured. In property
Risk Management and Insurance 47
 insurance, Moral Hazard occurs when someone who has
home insurance tends not to take care of or not secure
their property properly because they believe losses due
to damage will be reimbursed by the insurance company.
Moral Hazard can also arise in the business environment,
when a CEO or manager of an insured company feels free
to take big risks despite the risk of causing losses
knowing that the company has insurance protection for
the potential loss.

c) Chemical hazards are a type of hazard related to

chemicals or hazardous substances that can cause
poisoning, allergic reactions, or physical injury.
Examples of chemical hazards include toxic materials,
corrosive materials, hazardous chemicals, and toxic
waste.

d) Biological Hazard is a type of hazard associated with

micro-organisms or biological materials that can cause
disease or infection in humans, animals, or plants.
Examples; viruses, bacteria, parasites, toxic fungi, and
harmful biological materials.

e) Psychosocial Hazard is a type of hazard related to

Risk Management and Insurance 48

 psychological and social factors that can cause stress,
mental disorders, or other health problems. Examples
include excessive work pressure, workplace harassment,
and work-life balance disorders.

Understanding perils and hazards is important in risk

management, as it helps identify and evaluate the risks that
individuals, organizations or communities may face. By
recognizing perils and hazards, appropriate risk prevention
and mitigation measures can be taken to protect assets and
maintain safety.

2.6 Types and Types of Risk.

In this section, various types of risks that
organizations and businesses often face are explained.
Operational risks related to internal processes in an
organization, financial risks related to market fluctuations
or changes in economic conditions, reputational risks that
can arise due to various things, such as scandals, ethical
discrepancies, and others. Students will be invited to
understand that risk is an integral part of various aspects of
life and activities.

Risk Management and Insurance 49

 Risk types can be grouped into 3 (three) main
categories: pure risk, speculative risk, and other risk. The
following is a brief explanation of each type of risk:
1. Pure risk is a type of risk where there are only two
possible outcomes, which are adverse or non-adverse
events. There is no chance of profit or positive outcome
in pure risk. Examples of pure risks are accidents, fires,
natural disasters, and death. Insurance is generally used
to manage pure risk.
2. Speculative risk is a type of risk where there are three
possible outcomes: an adverse event, a neutral outcome,
or a favorable event. This risk is generally associated
with the possibility of gains and losses, so people may
take on particular risks in the hope of making a profit.
Examples of particular risks are investments in the stock
market, business ventures, and gambling.

3. Other Risks, In addition to pure and particular risks,

there are several other types of risks that an individual,
company, or society may face. Examples of other risks
include operational risk (related to a company's internal
processes and activities), financial risk (related to
fluctuations in asset and debt values), reputational risk

Risk Management and Insurance 50

 (related t o public perception of an entity), and strategic
risk (related to strategic decisions that may affect overall
performance).

Different types of risks can be faced by individuals,

organizations, or business entities. Here are some types of
risks that generally occur frequently, namely:
a) Financial Risk, which involves instability in financial
assets, liabilities, or income that can affect the financial
health of an organization. This includes currency
fluctuation risk, interest rate risk, credit risk, and
liquidity risk.
b) Operational Risk. Risks associated with errors or
failures in the processes, systems, or operational
activities of an organization. Includes human error risk,
information technology risk, legal risk, and security risk.
c) Market Risk, which arises from changes in market
conditions that may affect the value of an asset or
investment. This includes equity risk, bond risk,
commodity risk and foreign exchange risk.
d) Policy and Regulatory Risk. Risks associated with
changes in government policies or industry regulations
that may affect an organization's operations or profits.

Risk Management and Insurance 51

 Changes in taxes, environmental regulations, or trade
regulations and others.
e) Reputational Risk. Risks involving damage to an
organization's image or reputation due to scandals,
negative incidents or adverse media coverage, which
can impact the trust of customers, business partners and
other stakeholders.
f) Disaster Risk. Risks associated with the possibility of
natural disasters, such as earthquakes, floods, storms, or
industrial accidents that may cause physical damage
and loss of assets.
g) Geopolitical Risk. Risks associated with political
instability or conflict at the regional or global level that
may affect economic and business conditions. Changes
in foreign policy, international sanctions, or war are
examples of geopolitical risks.
h) Health and Safety Risks, Potential hazards to
employees or consumers that could cause injury or
health problems. Example: Unsafe working conditions
or defective products, unhygienic workplaces and
others.

Risk Management and Insurance 52

i) Competitive Risk, arises when competitors take steps
that could threaten an organization's market share or
competitive advantage. Example: Changes in industry
trends, new products or services from competitors, or
effective marketing strategies.

2.7 Risk Components.

Risk Components consist of several elements that help
in identifying, measuring and managing risks in a
comprehensive manner. Some important risk components
include:
▪ Risk Source refers to the entity, process, activity or
event that causes the risk to arise. It can be a variety of
internal or external factors that contribute to the
potential for an adverse or undesirable event to occur.
Risk sources can be physical conditions, operational
processes, external changes, or natural events.
▪ Threats are potential adverse risks or events that can
have a negative impact on objectives, assets, or interests.
Threats can be natural disasters, cyber-attacks, financial
losses, accidents, or other disruptions that disrupt and
cause losses.

Risk Management and Insurance 53

▪ Vulnerability is the inability or unpreparedness of an
entity or system to face or survive a particular threat or
risk event. These vulnerabilities can stem from
weaknesses in infrastructure, lack of security systems,
or inaccuracy in responding to threats.
▪ Impact is a measure of the level of loss or consequence
that can occur as a result of the occurrence of a
particular risk or risk event. Impact can be financial,
operational, reputational, or even impact human safety.
▪ Probability refers to the likelihood or occurrence rate
of a risk occurring. It is measured by how often a
particular risk or event can occur within a certain period
of time. Probability can be expressed as a percentage or
as a decimal number.

▪ Risk Level is the result of a risk assessment and analysis

that reflects a combination of risk probability and
impact. It describes the overall level of risk and
identifies risks that should be given further attention.

By understanding and identifying the components of

risk, an organization or individual can develop appropriate
strategies and actions to effectively manage, mitigate or
avoid risk. The risk management process involves a
Risk Management and Insurance 54
comprehensive analysis of the components of risk to aid in
intelligent, data-driven decision-making.
Knowing and understanding the types of risks is
essential for effective risk management to minimize
negative impacts and maximize opportunities. Good
decision-making and appropriate risk management
strategies can help an organization deal with uncertainty to
achieve its goals.

2.8 Definition of Risk Management.

Risk management can generally be defined as the
process of organizing to identify, analyze, evaluate, control,
and manage risks faced by a company or organization.

The goal of risk management is to reduce or minimize the

negative impact of existing risks and maximize existing
opportunities to achieve organizational goals. Here are some
important points about risk management:
1. Risk identification. The process of identifying risks that
may be faced by the company, both internal and external
risks, such as operational risk, financial risk, reputation
risk, legal risk, and others.
2. Risk analysis. Analyze the identified risks to understand

Risk Management and Insurance 55

 their potential impact and likelihood of occurrence.
3. Risk evaluation. Assess the level of risk and measure its
impact on the company's objectives and determine the
priority of risk handling.
4. Risk control. Develop and implement strategies and
control measures to reduce risks or minimize their
negative impact.
5. Monitoring and reporting. Monitoring existing risks,
evaluating the effectiveness of control measures taken,
and preparing reports on risks to relevant parties.

Risk management has an important role in helping

companies face risks that may occur and maintain
operational sustainability and achieve organizational goals.
With effective risk management, companies can anticipate
and manage risks better, thereby reducing financial losses,
protecting the company's reputation, and increasing the
trust of stakeholders. Some definitions of Risk Management
(MR) according to risk management experts include:
1) In the book "Risk Management and Financial
Institutions" by John C. Hull, (Wiley, 2012). Definition of
"Risk management is the process of identifying,

Risk Management and Insurance 56

 measuring, and managing risk to reduce uncertainty
in achieving organizational goals"
2) In the article "Understanding Risk Management" by
Carol Alexander, (2008). Definition of "Risk
management is a series of activities to identify,
measure, and manage the risks faced by the
organization to achieve the desired goals"
3) According to the book "The Risk Management Process:
Business Strategy and Tactics" by Christopher L. Culp
(2001). Definition: "Risk management is the use of
strategies, policies, and processes to identify,
measure, manage, and mitigate the impact of risk on
enterprise value"
4) In the article "Risk Management: Ten Steps to Greater
Safety" by Patrick Hudson (2001). Definition "Risk
management is a structured process for identifying,
measuring and managing risk in the most effective
and efficient way"
5) In the book "The Essentials of Risk Management", Michel
Crouhy, Dan Galai, Robert Mark (2014). Definition of
"Risk management is a structured approach to
identifying, measuring, and managing risks in order

Risk Management and Insurance 57

 to achieve business objectives and avoid or reduce
potential losses"

6) According to the book "Enterprise Risk Management:

From Incentives to Controls" by James Lam (2003). The
definition of "Risk management is an ongoing
process of planning, organizing, leading, and
controlling organizational resources to reduce the
effects of uncertainty on implementing strategies
and achieving business objectives".
7) In the article "The Nature of Risk Management", Power
(2004). "Risk management is a set of activities that
includes identifying, measuring, and managing risk,
and understanding the implications of risk on
organizational performance."
8) In the book "Financial Risk Management: Models,
History, and Institutions", Allan M. Malz (2011). The
definition of "Risk management is a process that
involves the recognition and analysis of risks faced
by an organization, and the implementation of
appropriate policies and actions to reduce or
overcome those risks."

Risk Management and Insurance 58

9) According to the article "The Role of Risk Management
in Corporate Governance", John Fraser, B. Simkins
(2010). The definition of "Risk management is the
integration of a risk-based approach into the
decision-making process, strategic planning, and
operations of an organization to achieve objectives
more effectively and efficiently."

10) In the book "Managing Risk in Organizations: A Guide for

Managers", P. Hopkin (2012). "Risk management is the
process of identifying, assessing, and managing risks
associated with organizational goals and objectives,
by minimizing undesirable risks and maximizing
profitable opportunities."

The definitions of MR above reflect various views

and approaches in understanding risk management. Each
definition highlights the importance of a systematic process
to identify, measure, and manage risks in order to achieve
objectives and maintain organizational sustainability.

Risk management is important for organizations in

the face of an environment full of uncertainty and

Risk Management and Insurance 59

complexity. Risk management is recognized as an effective
tool in dealing with uncertainty, protecting corporate value,
and improving organizational performance and
sustainability amid the challenges of a dynamic business
environment.

2.9 The Importance of Risk Management.

This section will emphasize the importance of risk
management in dealing with a world full of uncertainty and
change. By implementing risk management, an organization
or individual can minimize the negative impact of risks and
optimize positive opportunities. Risk management is also
related to protecting assets, achieving goals, and
maintaining the good reputation of an organization or
company. The importance of risk management has been
recognized and adopted by experts and researchers in
various fields. Here are some reasons why risk management
is considered important:
a) Reducing Financial Losses: Risk management helps
organizations identify potential risks and take
preventive measures to reduce or avoid financial losses
that could occur. By managing risks well, companies can

Risk Management and Insurance 60

 reduce the negative impact on their finances and still
operate efficiently.
b) Improving Strategic Decisions: Managing risks helps in
identifying opportunities and challenges in the business
environment. By understanding the risks involved in
strategic plans, organizations can make better decisions
and focus on long-term goals.
c) Increasing Stakeholder Trust: Effective risk
management demonstrates an organization's
commitment to protecting the interests of stakeholders
such as employees, customers, and business partners.
This can enhance the trust and reputation of the
organization in the eyes of stakeholders.
d) Provides Better Competitiveness: Organizations with
good risk management are better equipped to deal with
market changes and competitive challenges. Companies
can better adapt to changes in the business environment
and remain relevant in the industry.
e) Improving Compliance and Ethics: Risk management
includes monitoring and compliance with applicable
regulations and business ethics. This helps organizations
to operate in compliance with the law and avoid adverse

Risk Management and Insurance 61

 legal consequences.
f) Improving Operational Efficiency: By identifying risks
and taking preventive measures, organizations can
reduce potential operational disruptions and improve
efficiency in business processes.
g) Dealing with Uncertainty: Uncertainty is a reality in the
business environment. Risk management assists
organizations in understanding and dealing with
uncertainty by planning appropriate responses should
risks occur.
h) Enhancing Innovation and Creativity: Proper risk
management gives organizations the confidence to take
risks in an effort to create innovation and seek new
opportunities.

Experts and researchers in the field of risk

management continue to develop methods and best
practices to deal with challenges related to uncertainty and
risk. By prioritizing risk management, organizations can
gain a competitive advantage, achieve goals and face the
future more optimistically.

Risk Management and Insurance 62

2.10 Relevance for Students.
In this section, it is explained how students can
understand and apply risk management concepts in their
studies and life in preparation for future challenges. For
example, companies need to understand financial risk
management as a case study to manage company finances,
students need to understand risk management from case
studies to provide opinions, and students also need to
understand risks related to the development of new
technologies.
Risk management has a very important relevance for
students in various fields of study. Here are some reasons
why risk management is relevant to students:
1) Facing Career Uncertainty. For students who are
about to enter the workforce, risk management helps
them to be better prepared to face career uncertainty so
that they can become entrepreneurs in accordance with
their knowledge. By understanding the risks associated
with career choices, students can make the right plans
and strategies to achieve their career goals.
2) Thoughtful Decision Making. Students are faced with
many important decisions during their studies. Risk

Risk Management and Insurance 63

 management helps students to analyze risks and
consider the consequences of their choices, so that they
can make wiser decisions.
3) Improving Learning Efficiency. In studying and doing
coursework, risk management helps students to identify
potential risks that may hinder their learning efficiency.
By planning and managing time, assignments, and
projects well, students can reduce the risk of delays and
manage academic activities.
4) Personal Financial Management. Students are often
faced with managing personal finances, setting a budget,
managing student loans, or deciding to invest. Risk
management helps students to understand financial
risks and make smart decisions to plan for future
finances.
5) Enhance Creativity and Innovation. Students can use
the principles of risk management to create innovation
and creativity in their projects. By identifying and
managing risks, students can try out new ideas with the
confidence and ability to deal with the possibility of
failure.

Risk Management and Insurance 64

6) Project and Assignment Management. Risk
management is highly relevant in the management of
projects or coursework. Students can use a risk
management approach to plan for and overcome
challenges that may arise during the process of working
on an academic assignment or project.
7) Facing the Challenges of College: During their studies,
students are faced with various academic, social and
personal challenges. Risk management helps them to
face challenges with more confidence and minimize the
risk of negative impacts.

Overall, risk management is a valuable skill for

students, not only to face challenges in the academic
environment, but also to prepare themselves to face
challenges in the working world and real life after
graduation.
By understanding and applying risk management
concepts, students can become more effective, intelligent,
and responsive in dealing with uncertainty and risk in
various aspects of life in the future. Risk management will
be indispensable after students enter the business world,

Risk Management and Insurance 65

facing various risks that will be faced.

2.11 Duties and Functions of Risk Manager.

In a corporate company today there is a position
related to risk management. To perform the functions,
duties and responsibilities of the risk management process
in a company, a Risk Manager is required. The duties and
functions of a Risk Manager in a corporate company are as
follows:
1. Risk Identification: Risk Managers are responsible for
identifying risks that the company may face. They
conduct a comprehensive risk analysis by identifying
potential operational, financial, legal, reputational, and
other risks. This involves gathering information,
conducting risk assessments, and identifying factors that
could lead to risks.
2. Risk Evaluation: Risk Managers evaluate the identified
risks to understand the impact and likelihood of their
occurrence on the company. They analyze the data and
information obtained to determine the level of risk and
its potential consequences to the company's operations,
finances, and objectives.

Risk Management and Insurance 66

3. Designing Risk Management Strategies: Based on the
results of the risk evaluation, Risk Managers design risk
management strategies that are in line with the
company's objectives. They develop policies and
procedures that define the steps to be taken to reduce,
transfer, avoid, or accept risks. This strategy focuses on
optimizing risks in order to achieve the company's
objectives in an efficient and effective manner.
4. Implementation of Risk Management: Risk managers
are responsible for implementing the risk management
policies and procedures that have been designed. They
work closely with other departments and teams within
the company to ensure that risk management measures
are properly implemented and followed. This involves
training employees, monitoring and reporting on risks,
and coordinating necessary actions to reduce or avoid
risks.
5. Developing Management Recommendations: Risk
managers develop management recommendations based
on risk analysis, risk management strategies, and risk
monitoring results. They provide management and
stakeholders with relevant information regarding the

Risk Management and Insurance 67

 risks involved, implications for the company's objectives,
and recommendations for appropriate actions to manage
the risks.
6. Monitoring and Reporting: The Risk Manager (RM) is
responsible for monitoring risks on an ongoing basis and
producing regular reports to the management and risk
committee of the company. The RM tracks the
development of risks, re-evaluates the risk management
strategy, and provides the necessary information for
appropriate risk-related decision-making.
In order to carry out its duties and functions, the Risk
Manager works closely with the rest of the management
team, finance, legal and operational department staff to
effectively manage risks and ensure that the company can
operate more safely, efficiently and achieve its set
objectives.

Risk manager type and character refers to the

approach taken by a risk manager in dealing with the risks
faced by the organization. The following is an explanation
of some general types of risk managers:
1. Risk Taker: is the type of Risk Manager who tends to take
significant risks in an effort to achieve high results. They

Risk Management and Insurance 68

 focus more on opportunities than on risk mitigation.
Typically, a Risk Taker has a deep understanding of the
risks at hand and is willing to take the associated risks if
the benefits are deemed to outweigh the possible losses.
However, this approach can also be risky and requires
strong expertise in managing risk.
2. Risk Avoider is a type of Risk Manager who seeks to
completely avoid or reduce the risks faced by the
organization. They focus more on identifying and
avoiding risks than on capitalizing on opportunities. This
approach can be taken by avoiding activities or decisions
that could generate risk, such as stopping high-risk
projects or limiting exposure to market or credit risks.
3. Risk Reducer is a type of Risk Manager that seeks to
reduce risk through systematic risk management
measures. Tends to use a risk reduction approach that
involves identifying risks, assessing risks, developing
risk reduction strategies, and implementing appropriate
actions to reduce risks. The Risk Reducer ensures that
policies and procedures are properly executed and
implemented.

Risk Management and Insurance 69

4. Risk Shifter is a type of Risk Manager who transfers risk
from the organization to a third party or insurance. They
tend to experience risks in business activities and use
instruments such as insurance or contracts to mitigate
those risks. This allows the organization to optimize
potential profits while easing the transfer of risk to other
parties who are better able to handle it.
5. Risk Accepter: is the type of risk manager who accepts
risk without trying to reduce it or transfer it. They tend
to believe that risk is part of the business and seek to
manage risk by monitoring and managing it, but do not
actively try to eliminate or reduce the risk. Focus on
potential benefits and can take moderate risks.
Each type of Risk Manager has a different approach
in dealing with the risks faced by the organization. Which
decision to take depends on the goals, risk tolerance level,
and specific conditions of the organization.

With an in-depth explanation in the introduction

section, students are expected to gain a strong foundation
of understanding about risk and risk management. This will
be a good foundation for understanding the subsequent

Risk Management and Insurance 70

sections of the textbook "Risk Management: A Practical
Guide for Students" which will discuss in more detail the
steps and techniques in risk management, case studies,
ethics, social responsibility, and future challenges relevant
to the topic.

Summary.

Chapter 2 discusses uncertainty and risk, starting

with the definition of uncertainty and risk, and how they
differ. Uncertainty is a condition where the information or
outcome of an event or action cannot be predicted with
certainty, while risk is the potential for loss or negative
impact due to uncertainty. Risk can come from a variety of
sources, including financial, operational, market,
reputational and other risks.
Chapter 2 provides a comprehensive explanation of
uncertainty and risk, as well as the different types of risks
that may be encountered in various contexts. Uncertainty is
an inherent reality in life, the business world, academic
environments, and in organizations. Risk is the consequence
of uncertainty, and its existence can threaten the goals and
sustainability of an entity.

Risk Management and Insurance 71

 This chapter also discusses the types of risks and
their application in various contexts. Some common types
of risk include financial risk, operational risk, market risk,
reputational risk, policy and regulatory risk, health and
safety risk, and competitive risk. Each type of risk has
different characteristics and implications, and proper risk
management is key in dealing with uncertainty.
Risk identification and analysis is an important first
step in risk management. By recognizing risks and
identifying sources of risk, individuals and organizations
can understand the potential impact and plan appropriate
responses. Strategies to reduce or avoid risks have been
described, such as risk transfer through insurance,
mitigation by preventive measures, diversification, risk
aversion, and so on.
The relevance of risk management for students is
very important as it helps them in dealing with
uncertainties in their careers and making wiser decisions in
their future planning. For entrepreneurs, risk management
is key in maintaining business continuity and success.
By identifying and managing risks properly,
entrepreneurs can reduce negative impacts and take

Risk Management and Insurance 72

advantage of opportunities. As for organizations, risk
management is important to achieve goals and minimize
the impact of risks on organizational performance and
ensure business continuity and sustainability. In various
life contexts, uncertainty and risk will always exist.
Therefore, risk management is an important tool in facing
challenges and achieving success.
Recognizing risks, identifying risks, and planning
appropriate responses are critical steps in dealing with
uncertainty and mitigating its impact. Thus, risk
management becomes an essential component for
students, entrepreneurs, and organizations to achieve
success in an environment filled with uncertainty.
In conclusion, risk management has crucial
relevance for students, entrepreneurs, and organizations.
Students can better deal with uncertainty in their careers
and decision-making through risk management.
Entrepreneurs and organizations can maintain the viability
and success of their businesses by identifying and managing
the risks they face. Organizations can achieve their goals
more effectively and can avoid fatal losses or avoid huge
losses because all risks have been identified, mitigated and

Risk Management and Insurance 73

evaluated, minimized and measured using risk management
techniques.

Practice Essay Questions.

1) What is Uncertainty and give an example.
2) Please give 5 (five) definitions of Risk according to
experts!
3) Are Uncertainty and Risk the same? If not the same, how
are Uncertainty and Risk different?
4) Explain Pure Risk, Speculative Risk and Particular Risk?
5) List the risks that must be watched out for according to
OJK Regulation No. 44/2020!

Multiple Choice Problem Practice.

1. What is uncertainty?
a. Potential for loss or negative impact.
b. A condition where the outcome or information cannot
be predicted with certainty.
c. Strategies to reduce the impact of risks.
d. Risk identification process in project management.
2. Risk is the consequence of what?
a. Accident.
b. Uncertainty.
c. Poor planning.
d. Luck.
3. Types of risks associated with changes in
Risk Management and Insurance 74
 What is government policy or regulation called?
a. Operational risk.
b. Financial risk.
c. Reputation risk.
d. Policy and regulatory risk.

4. Risk management strategies that transfer

risk to a third party through insurance is called?
a. Risk mitigation.
b. Diversification.
c. Risk aversion.
d. Risk transfer.
5. Why is risk management relevant for students?
a. To avoid high-risk activities.
b. To manage career uncertainties and make wise
decisions.
c. To diversify the investment portfolio.
d. To minimize operational risk.
6. What is done in the risk analysis stage?
a. Monitor risks on a regular basis.
b. Identify risks and assess their impact.
c. Transferring risk through insurance.
d. Avoiding high-risk activities.

Risk Management and Insurance 75

 7. Why is risk management important for entrepreneurs?
a. To maximize profits.
b. To avoid financial risk.
c. To maintain business continuity and success.
d. To manage uncertainty in the project.
8. What is the next step after risk identification in
risk management?
a. Formulate risk control strategies.
b. Assess the impact of the risk.
c. Allocate additional resources.
d. Diversify the investment portfolio.
9. What is diversification i n
investment context?
a. Strategies to avoid risk.
b. Strategies to reduce the impact of risks.
c. Strategies for allocating additional resources.
d. Strategies to reduce career uncertainty.
10. How risk management helps organizations
achieve their goals?
a. By allocating more funds.
b. By identifying and managing risks properly.
c. By avoiding high-risk activities.
d. By reducing the number of employees.

Risk Management and Insurance 76

 Hopefully, the questions above will help improve your
understanding of uncertainty and risk as well as relevant
risk management in various contexts. Happy learning!

The following are the answer keys to the 10 multiple-choice

questions:
1. Answer : b. Conditions in which the results or
information cannot be predicted with certainty.
2. Answer : b. Uncertainty.
3. Answer : d. Policy and regulatory risk.
4. Answer : d. Risk transfer.
5. Answer : b. To manage the uncertainty i n
career and make decisions that
wise.
6. Answer : b. Identify risks and assess
impact.
7. Answer : c. To maintain continuity and
business success.
8. Answer: a. Formulate a risk control strategy
9. Answer : b. Strategies to reduce the impact of risk
10. Answer : b. By identifying and managing
risk well.

Hopefully these answers will help you to understand the

basics of risk management! If you have any further
questions or need further explanation, please do not
hesitate to ask the lecturer concerned. Happy learning!

Risk Management and Insurance 77

 CHAPTER III. INSURANCE

This chapter is about one of the important methods

in the final process of risk management, the Transfer of Risk
to an "Insurance Company". Insurance is a form of financial
protection that provides guarantees against financial risks
or losses that can occur as a result of various unexpected
events.
Readers are invited to explore the basic principles of
insurance, how insurance operates, and its role in protecting
individuals, businesses, and society from unexpected financial
risks. This chapter will explain the concepts of premiums,
policies, claims, and commonly used types of insurance. In
addition, we will also highlight the importance of an in-
depth understanding of insurance as an effective tool in
dealing with uncertainty and how to apply it wisely to
protect assets and achieve financial sustainability.
Let's begin our journey to understand more about
insurance and how it plays a role in shaping a more stable
and secure environment from lurking risks.

Insurance today has been an integral part of human

Risk Management and Insurance 78

economic activity since ancient times. Some of the earliest
evidence of the principle of insurance can be found in the
ancient civilizations of Babylon, China and Egypt. In the
beginning, insurance was more of a collection of donations
to help members of the community who suffered losses, for
example, due to natural disasters or merchant ship
accidents.
Insurance comes from English "Insurance" and
Italian "Assicurazione". The word "Insurance" in English
comes from the root word "insure" which means to provide
guarantees or protection against unwanted risks or losses.
This term is used to describe the concept or principle of
insurance in which the insured party pays a premium to the
insurance company to obtain protection or financial
compensation in the event of a guaranteed risk.
In Italian, the word "Assicurazione" has a similar
meaning to the English "Insure", which is a form of
financial protection or guarantee against risk. The word
refers to the same process and concept in insurance where
a person or entity pays a premium to obtain financial
protection or be reimbursed in an undesirable situation.
Insurance is a financial mechanism commonly used

Risk Management and Insurance 79

to reduce financial risk and protect individuals, businesses
or organizations from losses that may occur due to
unforeseen or unavoidable events. The term "Insurance"
or "Assicurazione" is used around the world to describe
this concept and is an integral part of risk management.

3.1 Definition of Insurance.

Insurance is a form of agreement between two
parties, namely the risk receiver (Insurer) and the party
transferring the risk (Insured), as the guaranteed party. The
Insured Party pays a sum of money called an insurance
premium or fee, while the Insurer, provides full protection
to the Insured in the event of a loss / damage that befalls the
assets or property of the premium payer in accordance with
the agreement made.
According to Indonesian Law No.40/2014
Insurance is an agreement between two parties,
namely the insurance company and the policy holder,
which is the basis for receiving premiums by the
insurance company in return for:
• Provide compensation to the insured or policyholder
for loss, damage, costs incurred, loss of profit, or
legal liability to third parties that the insured or
policyholder may suffer due to the occurrence of an
uncertain event; or
• Providing payments based on the death of the
Risk Management and Insurance 80
 insured or payments based on the life of the insured
with benefits that have been determined and / or
based on the results of fund management.

Insurance has three main elements, namely:

insurance premiums, insurance policies, and insurance
claims. Types of insurance companies include: General
Insurance, Life Insurance and Compulsory Insurance / Social
Insurance. An Insurance Company is a company that
provides services in risk management and provides payments
to policyholders, the insured, when there is a disaster of
damage or loss. While a Reinsurance Company is a
company that provides services in reinsurance against risks
faced by insurance companies, guarantee companies, or other
reinsurance companies.
Insurance companies can utilize the services of
reinsurance companies to reduce risk or minimize the
negative impact of existing risks. Some definitions of
insurance from various literatures are as follows:

1. According to Mehr & Commack (1997; 71) Insurance is a

social tool to reduce risk, by combining a number of units
exposed to risk. Insurance is also defined as a tool to reduce
financial risk by collecting a sufficient number of units.

Risk Management and Insurance 81

2. Robert I. Mehr states that Insurance is a tool to reduce a
risk by combining the number of units at risk so that a
collective individual loss can be predicted. The predictable
loss is then divided and distributed proportionally among
all units in the combination.
3. Mark R. Greene states that Insurance is an economic
institution that reduces a risk by combining under one
management and group of objects in a condition so that
large losses that occur are suffered by a group that can be
predicted in a more detailed scope.

4. Prof. Dr. Wirdjono Prodjodikoro, SH, in the book

Insurance Law in Indonesia, Insurance is an agreement in
which a party who guarantees promises to a party who has
been guaranteed, to get a sum of money in lieu of loss,
which may be suffered by the guaranteed, because it results
from an event that is not yet clear.
5. According to C. Arthur Williams Jr. & Richard M. Heins
stated that Insurance is a tool in which a risk of two or
more people or companies is combined through a definite
or predetermined premium contribution as a fund used to
pay a claim.
6. According to Kieso, Weygandt, and Warfield in the book

Risk Management and Insurance 82

 "Intermediate Accounting" (Wiley, 2016) Insurance is a
contract involving two parties, namely the insured party
and the insurance company. The insured party pays a
premium to the insurance company to get protection from
the risk of certain losses or injuries. If the risk occurs, the
insurance company will provide payments or benefits in
accordance with the terms of the contract.

7. Vaughan and Vaughan in the book "Fundamentals of

Risk and Insurance" (John Wiley & Sons, 2018). Insurance
is a mechanism that allows individuals or organizations to
transfer unwanted risks to another party (insurance
company) by paying a premium. In the event of a loss, the
insurance company will provide compensation payments
or benefits in accordance with the agreement in the
insurance policy."
8. Definition of Insurance according to J. David Cummins,
Richard D. Phillips in the book "Handbook of Insurance"
(Springer, 2013). Insurance is a contractual agreement
between the insured party and the insurance company, in
which the insured party pays a premium to receive
financial protection from the risks guaranteed by the
insurance company.

Risk Management and Insurance 83

 9. According to William R. Scott in the book "Risk
Management and Insurance" (McGraw-Hill, 2014).
Insurance is a bilateral agreement in which the insured
party pays a premium to the insurance company in
exchange for financial protection or compensation in the
event of a loss, accident, or other unexpected event
guaranteed by the insurance company."
10. Definition of Insurance according to Trowbridge G. Hoyt,
Kenneth E. Kovacs, and David B. Sommer in the book
"The Structure of Property and Liability Insurance"
(Prentice Hall, 2012). Insurance is a form of financial
protection in which the insured pays a premium to transfer
certain risks to the insurance company. The insurance
company is responsible for paying claims or benefits if the
risk occurs, thus providing financial security for the
insured.
11. The definition of insurance according to Article 246 of the
KUHD is an agreement in which an insurer by enjoying a
premium, binds himself to the insured to free him from loss
due to loss, damage or absence of expected profits, which
he will suffer because of an event that he might suffer due
to an uncertain event.

Risk Management and Insurance 84

 Modern insurance as we know it today began to
develop in the 17th century in England. Lloyds of London,
founded in 1688, was one of the first institutions to provide
ship insurance services. After that, insurance expanded
rapidly into various sectors and covered a wider range of
risks, such as fire insurance, life insurance, and health
insurance.
Insurance is an important mechanism in risk
management that has become an integral part of economic
activity. In Indonesia, there are types of insurance businesses
and various insurance products that offer protection against
various risks. Types of Insurance Businesses operating in
Indonesia are:

▪ Conventional and Sharia General Insurance.

▪ Conventional and Sharia Life Insurance.
▪ Social Insurance (ASABRI, TASPEN, Jasa Rahardja, BPJS).
▪ Conventional and Sharia Reinsurance.

Some of the most popular insurance products in

Indonesia today include:
1. Unit-linked Life Insurance. One of the life insurance

Risk Management and Insurance 85

 products provides protection against the risk of death or
total disability and permanent disability of a person and
is added with investment and savings benefits for the
future.
2. Health Insurance, which provides health insurance that
covers the cost of medical treatment, hospitalization, as
well as additional benefits such as reimbursement of
medicine costs.
3. Motor Vehicle Insurance. This type of insurance
provides protection against the risk of loss or damage to
motor vehicles due to accidents, theft, or natural disaster
events.
4. Fire Insurance: protects physical property, such as
houses, buildings, shops, shophouses, factories or
business assets, from the risk of loss due to fire, flood,
earthquake or other events.
5. Education Insurance. Designed to provide protection
and financial benefits that will help finance children's
future education.

3.2 Principles of Insurance.

Risk Management and Insurance 86

 Insurance principles are the guidelines or rules that
underlie insurance operations and contracts. These
principles form the foundation for the relationship between
the policyholder (Insured) and the insurance company
(Insurer). Here are some insurance principles and their
explanations:

a) The Principle of Utmost Good Faith: This principle

demands that both parties to an insurance contract, i.e.
the policyholder and the insurer, must act in perfect good
faith in providing correct and complete information
regarding the risks to be covered. The policyholder must
provide relevant information and not hide important
facts that may affect the risk assessment by the insurance
company. The term the principle of utmost good faith is
also known as the principle of uberrima fidei or the
contract of sale and purchase on the basis of good faith. In
principle, the Insured and the Insurer have the same
obligation regarding the duty of full disclosure, namely the
obligation to disclose material or important facts (all
material circumstances) fully and honestly.
Article 251 of the Commercial Code states that: "Any false
or untrue statement, or any failure to disclose matters

Risk Management and Insurance 87

known to the Insured, however good faith he may have, of
such a nature that if the Insurer had known the true state
of affairs, the contract would not have been concluded or
would not have been concluded on the same terms, results
in the cancellation of the insurance."
The Duty of Utmost good faith is defined as a positive
obligation to voluntarily disclose accurately and
completely all material facts about the risk being
requested to be covered, whether or not those facts are
inquired about.
The facts that must be disclosed in the context of utmost
good faith are:
1. Facts indicating that the risk requested to be covered
internally is larger/higher than the usual size for that
risk.
2. Facts showing that the risk requested to be covered is
greater than normal due to external factors.
3. Facts that may increase the amount of loss or make
the amount of loss larger than normal.
4. Record of losses and claims.
5. Rejection or harsh conditions imposed during the
previous closing by the insurer or other insurers.

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 6. Facts that limit the insurer's subrogation rights as the
insured mitigates the liability of third parties.
7. Complete facts related to the description of the object
of coverage.
b) The Principle of Insurable Interest: This principle states
that the policyholder must have a legitimate financial
interest in the assets to be insured. This means that the
policyholder must have a legal and economic relationship
or a reasonable interest in the guaranteed asset in order
to avoid moral or speculative risks.
c) Indemnity Principle: This principle states that the role of
insurance is to provide compensation or payment
equivalent to the loss suffered by the policyholder. The
aim is to return the policyholder to the same financial
position as before the loss occurred, without providing
excessive benefits.
In KUHD Article 246 and Law No. 2/1992, Article 1, it is
stated that insurance contacts except life insurance
contracts are indemnity contracts. The reason is because
the life and limb of a person cannot be measured in
money. In closing insurance on the life and personal
accident risk of a person, the insurer must be careful

Risk Management and Insurance 89

 regarding the determination of the insured amount or the
insured price. For life insurance, the amount of coverage
for a person's life is limited according to the insured's
ability to pay premiums. As for personal accident
insurance, the amount of coverage must be adjusted to
the normal income of the person concerned.
d) Principle of Contribution. Defined as the right of the
insurer to invite or request other insurers who are
equally responsible for the same insured to share an
indemnity payment. The Principle of Contribution in
Article 277 of the KUHD: "If various insurances, in good
faith, have been held regarding the only goods, while in
the first insurance only fully insured, then only the first
insurance is binding, while the subsequent insurers are
released. If in the first cover the full price is not insured,
the subsequent insurers shall be liable for the remaining
price, according to the order in which the following
covers are closed."
The Contribution Principle will only apply if the following
conditions are met:

• There are two or more indemnity policies involved.

• The policy guarantees or covers a common interest.

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 • The policy covers common perils.
• The policy guarantees a common subject-matter.
• Each policy covers the same loss.

e) Principle of Subrogation: The principle that states that

after paying a claim to a policyholder, the insurance
company has the right to replace the policyholder in suing
other parties responsible for the loss incurred. This aims
to prevent policyholders from being compensated twice
for the same loss.
In Indonesian law, the principle of subrogation is
regulated in Article 284 of the KUHD: "An insurer who has
paid for the loss of an insured item, replaces the insured
in all rights obtained against third persons related to the
issuance of t h e loss, and the insured is responsible for
every act that can give the insurer rights against third
persons."
The meaning of the article is that if the insured's loss is
caused by a third party, the compensation is transferred
to the third party who caused the loss, not to the insurer.
However, if the insured party still asks for compensation
to the insurance party, the insurance party has the right

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 to ask for compensation from the third party because the
insurance party has the right to replace the position of the
insured.
f) Proximate Cause Principle. This principle determines
that insurance will pay a claim if the loss is caused by the
event or cause guaranteed in the policy, even if there are
other causes that contribute to the loss.
Not all events can be recognized as the cause of the loss
but the event must meet the principles of insurance.
Proximate cause serves to find the most dominant main
event, which causes the loss of the covered object. This
event is then used to determine whether it is included as
a guaranteed event in the insurance policy. For example,
a house is insured for fire risk without any additional
coverage including flood, earthquake, storm, and
hurricane. One day the house caught fire. When the fire
occurred, there was a typhoon. In response to this event,
the insurance company will find out the main cause of the
fire whether due to hurricanes or electrical short circuits.
If the main cause turns out to be a hurricane, the
insurance company can reject the claim submitted
because the main cause is not included in the guaranteed

Risk Management and Insurance 92

risk. The International Risk Management Institute (IRMI)
provides a definition of proximate cause as the cause that
has the most significant impact in causing a loss under the
first party property insurance policy, when two or more
independent hazards, occur at the same time or
simultaneously resulting in a loss.
These insurance principles are an important foundation
in carrying out insurance contracts and creating a
trusting relationship between policyholders and
insurance companies. By adhering to these principles,
insurance can function effectively in protecting
policyholders from the risks they will face.
Insurance has a crucial role in the implementation of risk
management, for individuals and companies. Risk
management is the process of identifying, analyzing, and
managing risks that may be faced, with the aim of
reducing the negative impact of these risks. Insurance is
an important instrument in risk management because it
involves the transfer of risk from the policyholder to the
insurance company. Through premium payments,
policyholders can get financial protection if they
experience losses due to certain risks. By transferring risk

Risk Management and Insurance 93

 to an insurance company, individuals or companies can
avoid large financial losses that they may not be able to
bear on their own. Thus, insurance can help create
financial security and economic stability for the
community.
The role of insurance is increasingly important today
and in the future due to changes in the complexity of risks
faced by society and companies. Some factors that show the
importance of insurance are as follows:
1. Financial Protection: Insurance provides financial
protection for individuals and companies from
unpredictable risks, such as accidents, natural disasters,
or serious illnesses.
2. Product Innovation: The insurance industry continues to
innovate to create products that better suit the needs
and changing risk patterns amid technological
developments and social changes.
3. Investment and Economic Development: Through the
investment of premiums received, insurance companies
contribute to the development of the financial sector and
the national economy.
4. Disaster Impact Mitigation: Insurance can help reduce

Risk Management and Insurance 94

 the economic impact of natural disasters by providing
rapid recovery of funds to restore economic activity after
a disaster event.

5. Increased Financial Inclusion: Insurance plays an

important role in increasing financial inclusion, as it
provides opportunities for people who previously did
not have access to financial services.

Overall, insurance functions as a "stimulus to

business enterprise" and is highly beneficial to
policyholders. Insurance has become an important part of
maintaining economic stability, protecting people from
financial risks, and assisting in the management of complex
risks in the era of globalization and information technology.

3.3 History of Insurance.

Insurance has been an integral part of human
economic activity since ancient times. Some of the earliest
evidence of the principle of insurance can be found in the
ancient civilizations of Babylon, China and Egypt. In the
beginning, insurance was more of a collection of donations to
help members of the community who suffered losses, for

Risk Management and Insurance 95

example, due to natural disasters or merchant ship
accidents.
Modern insurance as we know it today began to
develop in the 17th century in England. Lloyds of London,
founded in 1688, was one of the first institutions to provide
ship insurance services. After that, insurance expanded
rapidly into various sectors and covered a wider range of
risks, such as fire insurance, life insurance, and health
insurance. Here are some of the world's oldest insurance
companies and their founding years:
a) The Guardian Assurance Company (UK). Founded in
1821 as a life insurance company and focused on
providing financial protection for policyholders' families.
b) Assicurazioni Generali (Italy). Founded in 1831, it is the
largest insurance company in Italy and one of the oldest
insurance companies in the world. The company provides
a wide range of general and life insurance services.
c) The Tokio Marine and Fire Insurance Company
(Japan). Founded in 1879. Tokio Marine is one of the
oldest insurance companies in Japan and has grown into
a global insurance company that provides insurance
services in various countries.

Risk Management and Insurance 96

d) The Life Insurance Corporation of India (India),
established in 1956 after the nationalization of the
insurance industry in India. LIC is the largest life
insurance company in India and has an extensive agent
network across the country.

It should be noted that some of the world's oldest

insurance companies may have undergone ownership
changes, mergers, or restructuring over time. However, they
still represent an important part of the history of the
development of the insurance industry in the world.

3.4 History of Insurance Companies in Indonesia.

Insurance developed in Indonesia through foreign
companies during the colonial period. In the 19th century,
Dutch insurance companies began operating in the Dutch
East Indies (Indonesia), however, after the proclamation of
independence of the Republic of Indonesia, the Indonesian
Government took over the ex-Dutch East Indies insurance
company into a state-owned company through the
Nationalization program.
The oldest insurance company in Indonesia and still
operating until independence is Asuransi Bumiputera 1912.

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Founded on August 24, 1897 under the name "De
Vereeniging van Voorzorg tegen Brandgevaar," the company
initially focused on fire insurance and other risks. Then, in
1912, the company changed its name to "Nederlandsch-
Indische Levensverzekering en Lijfrente Maatschappij
Bumiputera" which is better known as Bumiputera Life
Insurance 1912.
Asuransi Jiwa Bumiputera 1912 has been operating
for more than a century and is one of the largest and leading
life insurance companies in Indonesia. The company
provides a range of life insurance products, including unit-
linked, education insurance, and pension insurance.
"NV Verzekerings Maatschappij Lloyd Indonesische
Lloyd" known as "Asuransi Lloyd Indonesia.". Asuransi Lloyd
Indonesia was established in 1918 as the first general
insurance company in Indonesia. In the beginning, the
company focused on maritime insurance, specifically ship
and cargo insurance. Over time, Asuransi Lloyd Indonesia
developed other insurance services, including fire insurance
and life insurance.
After Indonesia's independence in 1945, Asuransi
Lloyd Indonesia adapted to the political changes and

Risk Management and Insurance 98

continued to grow as one of the leading insurance
companies in Indonesia. Lloyd's insurance company has a
long history and witnessed the journey of the insurance
industry in Indonesia from the colonial period to the present
day.
The next is PT Asuransi Jiwasraya, a life insurance
company established on October 31, 1859 under the name
"NV Levensverzekering en Lijfrente Maatschappij 'S' Lands
Welvaart." On December 13, 1960, the company changed its
name to "Perusahaan Perseroan (Persero) Jiwasraya" in
accordance with Law No. 19 of 1960. Jiwasraya Insurance
focuses on life insurance by offering various insurance
products such as education insurance, pension insurance,
and investment insurance. PT Asuransi Jiwasraya, plays an
important role in providing financial protection for the
people of Indonesia. Since December 2021, PT. Asuransi
Jiwasraya has changed its name to Indonesia Financial Life
(IFG Life).
History and development of PT Asuransi Jasindo
(Persero) ex Asuransi Bendasraja. On October 16, 1956, the
ex-Dutch general insurance company "NV.
Verzekeringsmaatschappij voor Binnenlandse Zaken en

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Benda" changed its name to Asuransi Bendasraya. As a
general insurance company, Asuransi Bendasraya provides
various types of insurance products such as motor vehicle
insurance, property insurance, and health insurance. The
company focuses on providing protection against risks
related to property and health.
In 1952, the Indonesian government established the
Indonesian Revival Insurance company, then in 1972 KAI
Insurance was merged with Bendasraya Insurance and 2
(two) insurance companies which then in June 1973,
changed its name to PT Asuransi Jasa Indonesia (Persero) or
Asuransi Jasindo.
Since 2022 PT Asuransi Jasindo (Persero) together
with several other state-owned insurance companies,
namely: Askrindo, Jamkrindo, Jasa Rahardja and Jiwasraya
(IFG Life), have joined the BUMN Insurance Holding Group
under the auspices of the Indonesia Financial Group (IFG).

3.5 Insurance Law in Indonesia.

The legality of the insurance business in Indonesia
has undergone development through various legal
regulations. The following is a summary of these legal
developments:

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1. KUHD (Kitab Undang-Undang Hukum Dagang) is the
initial regulation on insurance in Indonesia. The KUHD
was created based on Dutch law and was in effect during
the Dutch colonial period and became the legal basis for
various aspects of commerce, including regulations on
insurance.
2. Law No. 2/1992 on Insurance. The Indonesian
government issued the Law on Insurance, to regulate
insurance in Indonesia. This law replaces several
provisions that were previously regulated in the KUHD.

3. Law No. 40/2014 on Insurance, as a replacement for Law

No. 2/1992 as the legal basis for insurance in Indonesia.
Law No. 40/2014 provides a more comprehensive and
modern legal basis to regulate the insurance industry in
Indonesia covering various aspects of insurance,
including the formation of insurance companies,
financial requirements, consumer protection, standard
policy structure, and provisions regarding insurance
agents.

With the existence of RI Law No. 40/2014, the

insurance industry in Indonesia has a clearer and stronger
legal foundation, so that it is able to operate in a more

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orderly, transparent manner, and provide better protection
for stakeholders, such as insurance companies, insurance
agents, and policyholders.
Law of the Republic of Indonesia Number 40 Year
2014 aims to improve supervision and protection for
insurance stakeholders, including insurance companies, and
policyholders. Some important points in the Insurance law
in Indonesia, among others:
a) Company Establishment and Registration. Regulates the
requirements and procedures for establishing an
insurance company in Indonesia. Insurance companies
must be registered and supervised by the Financial
Services Authority.
b) Financial Obligations. Establish minimum capital
requirements that insurance companies must have to
ensure the stability and continuity of the Company.
c) Consumer Protection. Emphasizes consumer protection
and policyholder rights, including the obligation of
insurance companies to provide clear and accurate
information to policyholders.
d) Standard Policy Drafting. Stating that insurance policies
must be prepared based on the standards set by OJK to

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 prevent policies that are detrimental to policyholders.

3.6 General Insurance.

According to Law No. 40 of 2014 Insurance is an
agreement between two parties, namely an insurance
company and a policyholder, which is the basis for receiving
premiums by insurance companies in return for:
▪ Provides protection against risks that may occur to the
object of insurance, which includes life and body, human
health, legal liability, objects and services, and all other
interests that can be lost.
▪ Provides compensation in the event of damage or loss to the
object of insurance.

Insurance objects that can be insured in insurance

companies or insurance companies in Indonesia include:
Life and body, Human health, Legal liability, Objects and
services, All other interests that can be lost.
General insurance is a type of insurance that provides
protection against risks that may occur to assets or
property, such as motor vehicles, houses, buildings, and so
on. The general insurance company will provide

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compensation in the event of damage or loss to the asset or
property. Here are some types of general insurance that are
commonly offered by insurance companies in Indonesia:
• Motor vehicle insurance. Provides protection against the
risk of damage or loss of motorized vehicles, such as cars
or motorcycles.
• Property insurance. Provides protection against the risk of
damage or loss to property, such as a house or building.
• Health insurance. Provides protection against the risk of
health costs that may arise due to illness or accident.
• Travel insurance. Provides protection against risks that
may occur during the trip, such as Accidents, lost luggage
or illness.
• Ship Frame Insurance; provides protection against the risk
of damage or loss to the ship.

• Cargo Insurance; provides protection against the risk of

damage or loss to the goods being transported.
• Engineering Insurance (Construction All Risk, Erection All
Risk, Machinery Breakdown, Civil Engineering Completed
Risk): provides protection against the risk of damage or
loss in construction or engineering projects, such as
damage to buildings, machinery, or equipment.

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Scope of General Insurance in Indonesia, as follows:
1. General insurance companies are companies that provide
protection against risks that may occur to assets or
property, such as motor vehicles, houses, buildings, and
so on.
2. General insurance covers protection against many
objects or events, such as property, personal accident,
fire, vehicle, health, construction or building, and others.

3. General insurance products include motor vehicle

insurance, property, health insurance, travel insurance,
Ship Frame insurance, Cargo insurance, Engineering
insurance (CAR, EAR, CECR), and others.
4. General insurance provides compensation for loss or
damage that occurs to the insured object.
5. Premiums paid on general insurance, usually per year.
Except Engineering Insurance, based on the contract and
on cargo insurance, based on the shipment period or until
the arrival of the goods/cargo at the destination port.

In the insurance industry, general insurance

provides protection against risks that may occur to assets or

Risk Management and Insurance 105

property.
General insurance products include Motor Vehicle
Insurance, Property Insurance, Ship Frame Insurance, Cargo
insurance, Engineering insurance (Construction All Risk
Insurance-CAR, Erection All Risk Insurance-EAR, Machinary
Breakdown Insurance-MB, Civil Engineering Completed Risk-
CECR), and others. General insurance provides
compensation for loss or damage that occurs to the insured
object. General insurance premiums are usually paid
annually. Except construction insurance paid according to
the period in the Contract (SPK).

3.7 Life Insurance.

According to Law No. 40 of 2014 concerning
Insurance, life insurance is a business that organizes risk
management services that provide payments to
policyholders. The object of life insurance includes body and
soul.
Life insurance companies provide protection against
the risk of death or total and permanent disability (CTT) that
results in loss of income for the family left behind. Some
types of life insurance commonly offered by insurance

Risk Management and Insurance 106

companies include whole life insurance, term life insurance,
and Endowment Plan Insurance.
Life insurance is a type of insurance that provides
protection against the risk of death or total and permanent
disability (CTT) which results in loss of income for the family
left behind. The life insurance company will provide
compensation to the heirs if the insured dies or suffers total
and permanent disability. Here are some types of life
insurance that are commonly offered by insurance
companies:

• Pure life insurance: provides protection against the risk

of death or total and permanent disability.
• Term life insurance: provides protection against the
risk of death or total and permanent disability within a
certain period of time.
• Endowment Plan: provides protection against the risk of
death or total and permanent disability, and provides
cash value at the end of a certain period.
The scope of life insurance includes:
1. Providing risk management services that provide
payments to policyholders, insureds, or other interested

Risk Management and Insurance 107

 parties.
2. Provides financial protection for the family in the event of
death or loss of income of the insured.

3. Provides life insurance products, including annuity lines

of business, health insurance lines of business, and other
lines of business.
4. Organizing life insurance business, which includes pure
life insurance, term life insurance, and Endowment Plan.

5. Pay the sum insured at the agreed value if the insured dies
or suffers total and permanent disability (CTT).

In the insurance industry, life insurance is a type of

insurance that provides protection against the risk of death
or total and permanent disability (CTT) which results in loss
of income for the family left behind.

3.8 Compulsory Insurance.

Law No. 40/2004 on the National Social Security
System is a law that regulates social insurance in Indonesia.
Some things that can be identified from Law No. 40/2004
are as follows:

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 • Social insurance is a compulsory fund collection
mechanism derived from contributions to provide
protection against socio-economic risks.
• Law No. 40/2004 aims to provide comprehensive social
security for all Indonesians.
• This law develops the National Social Security System as
a form of social protection to fulfill the basic needs of a
decent life.
• There are Social Security Organizing Bodies (BPJS)
established under this law, such as BPJS Kesehatan and
BPJS Ketenagakerjaan.
• Law No. 40 Year 2004 Social insurance is a type of
insurance that provides protection against social risks,
such as the risk of work accidents, the risk of traffic
accidents, and the risk of accidents in sports activities.
Social insurance is managed by the government and is
usually compulsory for working people. Here are some types
of social insurance that are commonly offered by the
government:
▪ ASABRI (Social Insurance of the Armed Forces of the
Republic of Indonesia); provides protection against the risk
of death or total and permanent disability for members of

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 the TNI (Indonesian National Army).
▪ TASPEN (Tabungan dan Asuransi Pensiunan); provides
protection against the risk of death or total and permanent
disability for retired civil servants (Pegawai Negeri Sipil).
▪ Jasa Rahardja; provides protection against the risk of traffic
accidents.
▪ BPJS Kesehatan; provides protection against the risk of
health costs for all Indonesian people.
▪ BPJS Employment; provides protection against the risk of
work accidents and the risk of death due to work accidents.
The Government of the Republic of Indonesia
established social insurance with the aim of improving the
welfare of the community, especially employees and
pensioners. The purpose of social insurance is to provide
protection against socio-economic risks with a mandatory
fund collection mechanism from contributions. Social
insurance is part of the national social security system
regulated by law. However, low financial literacy and
minimal market penetration are challenges for the
insurance industry in Indonesia.

3.9 Reinsurance.

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 According to Law No. 40 of 2014 on Insurance, the
definition of Reinsurance: "the business of reinsurance
services for risks faced by insurance companies, guarantee
companies, or other reinsurance companies".
Reinsurance companies assist insurance companies in terms
of reinsurance against the risks faced by insurance
companies.
Reinsurance companies play an important role for insurance
companies in managing risks and increasing risk acceptance
capacity. An explanation of the importance of reinsurance
for insurance companies:
1. Risk sharing or spreading: Insurance companies can
share or spread the risks they face by utilizing the
services of reinsurance companies. This helps insurance
companies manage greater risks and reduce the risk
burden that must be borne alone.
2. Increase the capacity of insurance companies: With
reinsurance, insurance companies can increase their risk
acceptance capacity. Helping insurance companies face
greater risks and improving the company's ability to
provide protection against guaranteed risks.
3. Stabilization of company profits: Reinsurance can help

Risk Management and Insurance 111

 insurance companies maintain profit stability. By
utilizing the services of reinsurance companies,
insurance companies can reduce the risk of loss and
increase profits.
4. Increase public confidence: Insurance companies using
the services of reinsurance companies can increase public
confidence that insurance companies have the ability to
manage large risks and provide protection against
guaranteed risks.

In the insurance industry, reinsurance companies have an

important role in helping insurance companies to manage
risk and increase risk acceptance capacity. Therefore,
insurance companies can utilize the services of reinsurance
companies to improve their ability to provide protection
against guaranteed risks.
3.10. Global Insurance Development.
The current development of the global insurance
industry includes a number of significant trends and
changes in various aspects, including technology, regulation,
products, and a focus on sustainability. Some aspects of
global insurance development include:

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1. Digital Technology and Advanced Technology
Implementation: Global insurers are adopting
advanced technologies such as artificial intelligence
(AI), data analytics, and the Internet of Things (IoT) to
improve underwriting, and claims, based on customer
experience.
2. Fintech and Insurtech: Financial technology (fintech)
and insurtech (insurance technology companies)
companies are introducing innovations in insurance
products, distribution, and services that focus on
efficiency and personalization.
3. Changes in Compliance and Consumer Protection
Regulations: Regulators in various developed countries
are increasing stringent requirements related to
consumer protection, data privacy, and risk
management.
4. Financial Resolution: Regulators in various countries
are working to ensure that insurance companies have
adequate plans and capitalization to address significant
financial risks.
5. Usage-based Insurance: Usage-based insurance
products are increasingly popular, such as car

Risk Management and Insurance 113

 insurance based on driver behavior to pay premiums
according to how they drive.
6. Sustainability: There is increasing interest in insurance
that focuses on environmental and sustainability risks,
such as climate insurance that protects against climate
change related risks like floods and forest fires.
7. Globalization: Large insurance companies operating
globally, focusing on increasing markets in emerging
countries that have significant growth potential.
8. Impact of the COVID-19 Pandemic: Has had a major
impact on the insurance industry with a drastic
increase in claims in various fields, including health
insurance, business, and travel insurance, prompting
insurance companies to rethink how to manage
pandemic risk.

9. Cyber Security: The increasing cyber threats have made

cyber insurance even more important. The world's
major insurance companies can provide protection
against potential data breaches and cyber attacks.
10. Sustainability and Social Responsibility: There is
increasing awareness of the role of insurance in

Risk Management and Insurance 114

 supporting sustainability and social responsibility. This
includes investing in environmentally friendly projects
and sustainable policies.

The development and position of the Indonesian

insurance industry compared to the insurance industry of
ASEAN countries, as follows:
▪ The challenges faced by the Indonesian insurance world
are getting stronger with the invasion of foreign insurance
as a direct impact of globalization.
▪ Social insurance in Indonesia is a compulsory fund
collection mechanism derived from contributions to
provide protection.

▪ Low financial literacy in Indonesia is a challenge for the

insurance industry, including life insurance. Lack of
understanding about the benefits and importance of
insurance can hinder the growth of Insurance.
▪ Technological developments provide opportunities for
the insurance industry. Insurance companies need to
adopt new technologies to improve operational
efficiency, and face competition.
▪ Indonesia's insurance industry has great growth
Risk Management and Insurance 115
 potential, but is faced with several challenges, such as low
market penetration and the invasion of foreign insurance.
▪ According to the Indonesia Insurance Statistics 2021
published by OJK, the insurance industry in Indonesia
experienced gross premium growth of 4.4% in 2020, with
total gross premiums reaching IDR 285.6 trillion.
However, the life insurance industry experienced a
decline of 1.3% in 2020.
▪ In ASEAN countries, insurance penetration in Indonesia
is still low compared to other ASEAN countries.

▪ In facing challenges and capitalizing on opportunities, the

insurance industry in Indonesia needs to continue to
adapt and innovate. Collaboration between the
government, regulators, and insurance companies is also
important to create a conducive environment for the
growth and development of the insurance industry in the
future.

ASEAN insurance development is currently facing several

trends and challenges, as follows:
1. Technology: The development of technology, big data

Risk Management and Insurance 116

 analytics, and financial technology (fintech), has affected
the insurance industry in risk analysis, marketing, and
customer service.
2. Changes in Risk Patterns: There are changes in social,
economic, and environmental risks. Climate change,
industrial development, and technological innovation
must be accommodated by the insurance industry.
3. Globalization: Insurance is becoming increasingly
integrated in the global market, which requires insurance
companies to operate within an international regulatory
framework and compete globally.
4. Financial Inclusion: Efforts to increase financial inclusion
in various countries have led to the expansion of access to
insurance services for people who were previously
unreachable.

3.11. The Future and Challenges of Insurance in Indonesia.

The future of the insurance industry in Indonesia
promises great growth potential, but is also faced with
several challenges. Some aspects that affect the future of
insurance in Indonesia:
a) Globalization and Foreign Insurance Invasion. Along with

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 globalization, the insurance industry in Indonesia is
facing the invasion of foreign insurance companies. This
can be a challenge for local insurance companies to
compete and maintain market share.
b) Insurance Literacy. Low financial literacy and education
in Indonesia is a challenge for the insurance industry.
Lack of understanding of the benefits and importance of
insurance can hinder the growth of Insurance. Efforts to
increase literacy and education need to be made to
increase public awareness about insurance protection.
c) Regulation and Compliance. Regulation and regulatory
compliance are important challenges for the insurance
industry in Indonesia. Insurance companies must comply
with regulations set by the Financial Services Authority
(OJK) and other regulatory bodies to maintain the
integrity and public trust in the Insurance industry.
d) Technological Developments. Technological
developments, such as digitalization and artificial
intelligence, provide opportunities and challenges for the
insurance industry. Insurance companies need to adopt
new technologies to improve operational efficiency,
provide better services, and face increasingly fierce

Risk Management and Insurance 118

 competition.
e) Market Penetration. Another challenge is the low market
penetration. Despite Indonesia's large population, there
are still many people who do not have insurance.
Insurance companies must develop effective marketing
strategies to increase awareness and accessibility of
insurance products to the public.

f) Changing Demographics and Consumer Behavior.

Changing demographics and consumer behavior can
affect the future of insurance in Indonesia. Changes in
lifestyle, work patterns, and different protection needs of
younger generations can affect the demand and types of
insurance products needed.

In facing challenges, the insurance industry in Indonesia

needs to adapt and innovate. Collaboration between the
government, and insurance companies is also important to
create a conducive environment for the future development
of the insurance industry. The future of insurance is
influenced by the following key factors:
a. Digital Transformation: Insurance companies must adapt

Risk Management and Insurance 119

 to digital transformation and utilize technology to
provide more efficient, faster, and personalized services.
b. Financial Stability: Insurance companies need to
maintain financial stability and manage risks wisely in
order to survive fluctuating market conditions.
c. Microinsurance and Community-Based Insurance:
Microinsurance and community-based insurance
initiatives can help protect vulnerable communities
against risks and disasters.
d. Regulation and Compliance: Insurance companies must
remain compliant with applicable rules and regulations
and adapt to regulatory changes at the national and
international levels.
e. Changing Risk Patterns: Insurance companies must
continuously monitor and assess changes in risk patterns,
including those due to climate change and technology, in
order to develop products that meet market needs.

Insurance has undergone significant development

from its ancient history to become a complex global industry
today. In Indonesia, insurance is regulated by Law No. 40 of
2014 to provide protection for stakeholders. In the era of

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globalization and digitalization, the insurance industry is
faced with new challenges, while opening up opportunities
for the Insurance Industry in Indonesia.
To improve the insurance industry in Indonesia, the
Government together with the House of Representatives
issued a law regulating the Financial Sector Development
and Strengthening System (PPSK), Law of the Republic of
Indonesia Number 4 of 2023. This law aims to realize
national development supported by a resilient economy
through more optimal development and strengthening of
the financial sector.
Key points of Indonesian Law No. 4/2023 (PPSK):
• Support and realize efforts to develop and
strengthen the financial sector in line with the
development of an increasingly complex and
diverse financial services industry, a fast-
moving, competitive, and integrated national
and international economy, and an
increasingly advanced financial system.
• Increase public confidence in the National
Insurance Industry.

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Exercises and Group Assignments.

Make a study group with 3 (three) members and then work on

the essay questions below:
1. Mention 10 (ten) Definitions of General Insurance based on
the opinions of experts, books and articles and Explain 50
(fifty) General Insurance Products!
2. Mention 5 (five) definitions of Life Insurance and Explain 10
(ten) Life Insurance Products and their benefits!
3. State the Definition of Social Insurance or Compulsory
Insurance based on Insurance Law in Indonesia and
Describe and Explain all Social Insurance operating in
Indonesia!
4. Compare and contrast Social Insurance in 3 (three) ASEAN
countries, 5 (five) European countries and the United States.
What is the fundamental difference between compulsory
insurance in Indonesia and these countries!
Happy Group Work!

Risk Management and Insurance 122

 CHAPTER IV. RISK MANAGEMENT PROCESS

The Risk Management Process is the core of the book

which outlines in detail the steps in conducting risk
management. This process is a systematic and sequential
approach, aimed at identifying, analyzing, evaluating, and
addressing risks with appropriate strategies. Here are
further explanations for each step in the risk management
process:

4.1 Risk Identification.

How to identify potential risks in a given situation or
environment. Risk identification is the first step in the risk
management process. At this stage, readers will be invited to
identify all potential risks that can arise in a particular
situation or environment. This risk identification can be
done through various methods such as brainstorming,
analyzing historical data, consulting with experts, or using
risk analysis tools. general steps in conducting risk
identification:
1. Form a Risk Identification Team: Form a team or group
consisting of various stakeholders involved in the project

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 or goal. A team of people with different backgrounds can
help identify various risks from different points of view.
2. Gathering Information: The team should have information
about the project or goal at hand. This includes
information on the business environment, market
conditions, technical aspects, and other factors that may
affect the course of the project.
3. Identify Risk Sources: Identify various potential sources of
risk. Risk sources can come from various aspects, such as
operational, technological, environmental, financial,
legal, and human.
4. Identify Risk Types: Identify the types of risks that may
arise from each identified risk source. For example,
financial risk, market risk, reputation risk, technology
risk, and so on.

5. Risk Identification Tools: Use various risk identification

methods and tools, such as Brainstorming, SWOT
(Strengths, Weaknesses, Opportunities, Threats), thorough
business process analysis, or Fault Tree (FT) analysis.
6. Scale and Impact of Risk: Review the scale and impact of
potential risks. Risk identification involves ranking risks
based on the severity of their impact and the likelihood of

Risk Management and Insurance 124

 their occurrence.
7. Risk Register: Create a complete list of risks that have
been identified with risk descriptions and classifications.
8. Verification with Stakeholders: Verify the risk register
with relevant stakeholders to ensure that all significant
risks have been identified and understood.
9. Documentation of Results: the results of risk
identification, including risk register, risk analysis, and
risk rating should be recorded and well documented. The
documents will form the basis for the next steps in risk
management.

It is important to remember that risk identification is an

ongoing process that should be conducted in a structured
and systematic manner. Involving stakeholders and using
various tools and methods will help identify potential risks
more comprehensively and effectively. Risk identification is
the first step in risk management that enables organizations
to plan appropriate responses and face challenges more
readily.

4.2 Risk Analysis.

Analyzing the level of impact and likelihood of occurrence of
Risk Management and Insurance 125
the risk Once the potential risks have been identified, the
next step is to analyze the risk. At the risk analysis stage,
students will study and evaluate the level of impact and
likelihood of occurrence of the risk. The impact of the risk
reflects the extent to which the risk can impact the
achievement of the desired goal or objective, while the
likelihood of the risk occurring reflects how likely the risk is
to actually occur.
Risk analysis is the process of identifying, evaluating, and
understanding the potential impact of identified risks. The
general steps to perform a risk analysis are:
1. Determine Analysis Criteria: Determine the analysis
criteria that will be used to evaluate the risk. These
criteria may include severity of impact, likelihood of risk
occurrence, organizational risk tolerance, or other
criteria relevant to the project or activity objectives.
2. Collect Data: Collect relevant data and information
related to the identified risks. This data may include the
history of the risk, records of past events, financial data,
or any other information necessary to properly
characterize the risk.
3.

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4. Risk Evaluation: Use predefined analysis criteria to
evaluate risks. Consider the likelihood of the risk
occurring and its impact on the project or objectives.
Identify the most significant and high-impact risks.
5. Quantitative and Qualitative Analysis: Quantitative
analysis involves using data and numbers to measure
risk, such as statistical analysis or mathematical
modeling. Whereas qualitative analysis involves
subjective judgment based on the experience and
knowledge of experts.
6. Prioritize Risks: Prioritize risks based on the results of
the analysis. Focus on risks that have the greatest impact
and high probability of occurrence, as well as risks that
are most relevant to the project or activity objectives.
7. Identify the Root Causes of Risks: Identify the root
causes of the risks that have been identified. Understand
what causes the risk to occur and look for ways to reduce
or eliminate these root causes.
8. Plan for Risk Response: Create an effective risk response
plan. Identify mitigation actions that can be taken to
reduce the impact of the risk or address the risk if it
occurs.

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 9. Verification and Validation: Verify and validate the
results of the risk analysis with relevant stakeholders.
Ensure that the risk analysis has covered all relevant
information and thoroughly understand the impact and
likelihood of the risks.
10. Document Results: Document the results of the risk
analysis, including a prioritized list of risks, the analysis
methods used, and the risk response plan. This document
will guide you in managing risks throughout the project
or activity.

Risk analysis is an important step in risk management,

as it helps organizations to identify the most critical risks
and devise appropriate mitigation plans. By conducting a
comprehensive risk analysis, organizations can deal with
uncertainties more readily and reduce the negative impacts
that may occur.

4.3 Risk Evaluation.

Assess the urgency of risk handling based on the level of risk
faced. Risk evaluation is conducted to assess the urgency of
risk handling based on the level of risk faced. Risks that have
a large impact and high likelihood will be considered more
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urgent to handle, while risks with a small impact and low
likelihood may be handled at a later date or accepted with
the risk. Risk evaluation is the next step after risk
identification and analysis. Risk evaluation is done to
understand the potential consequences and impacts of the
risks that have been identified.

Here are the general steps for conducting a risk evaluation:

1) Using the Risk Matrix: Use a risk matrix to assess the
severity of the impact and the likelihood of the risk
occurring. The risk matrix is a table that represents the
level of impact and probability of the risk. Based on
subjective judgment, enter the risk into the appropriate
cell in the risk matrix.

2) Assess Consequences: Assess the consequences of each

identified risk. Consequences can be financial,
reputational, operational, legal, or other impacts to the
project or objectives.
3) Assessing the Likelihood of Occurrence: Assess the
likelihood (probability) of each risk occurring. The
likelihood can be assessed based on the history of similar
risks, historical data, or relevant expert opinion.

Risk Management and Insurance 129

4) Calculating Risk Value: Calculate the risk value for each
risk by combining the severity of the impact and the
likelihood of the risk occurring. This can be done using
methods appropriate to the risk matrix being used.
5) Prioritize Risks: Prioritize risks based on the calculated
risk scores. Focus on the risks with the highest risk
scores, which indicate the most significant impact and
high probability of occurrence.

6) Verification with Stakeholders: Verify the results of the

risk evaluation with stakeholders. Ensure that
stakeholders understand and agree with the established
risk priorities.
7) Establish Risk Response Measures: Based on the results
of the risk evaluation, establish appropriate risk response
actions. Identify mitigation measures or preventive
actions that can be taken to reduce the impact of the risk
or address the risk if it occurs.
8) Monitor and Review: Once the risk response actions are
implemented, continue to monitor and review the risks
periodically. Risk evaluation should be an ongoing
process, as the situation and business environment may
change over time.

Risk Management and Insurance 130

 9) Document Results: Record all risk evaluation results,
including risk prioritization, risk scores, assigned risk
response actions, and r i s k monitoring results. This
document will guide risk management throughout the
project or activity.

Through risk evaluation, organizations can identify the

most significant risks and plan appropriate actions to
manage and reduce the impact of possible risks. Risk
evaluation helps organizations to face uncertainties more
readily and increase effectiveness in achieving their goals.

4.4 Risk Management.

Is a strategy to reduce or avoid the risk. Once the risks have
been evaluated, the next step is to formulate strategies to
reduce or avoid the risks. Risk handling strategies can vary
depending on the type of risk and the context. Common
strategies in risk handling are risk transfer through
insurance, mitigating risks by taking preventive measures,
diversification, risk avoidance by avoiding high-risk
activities, and so on.

Risk Management and Insurance 131

Some common strategies in risk management:
1. Risk Transfer through Insurance: A strategy that
involves the process of transferring risk to a third party
through the purchase of an insurance policy. By insuring
risks, organizations or individuals can reduce the
financial impact of possible risks. For example, health
insurance, property insurance, or business insurance to
protect themselves from the risk of accidents or disasters.
2. Risk Mitigation with Preventive Measures: This
strategy takes preventive measures to reduce the
likelihood of a risk occurring and mitigate its impact if it
does. Implement strict safety procedures, employee
training, use of safer technology, or infrastructure
improvements to reduce operational risks.
3. Diversification: A diversification strategy is necessary in
investments, by diversifying the investment portfolio,
organizations can reduce the risks associated with
investments. Portfolio diversification can help spread
risk more evenly and reduce the risk associated with one
type of investment.
4. Risk Avoidance: This strategy seeks to avoid or change
high-risk activities or actions. If the risk is deemed

Risk Management and Insurance 132

 intolerable or unmanageable, then the best option is to
avoid the situation or activity that potentially poses the
risk.
5. Risk Mitigation with Project Management: This
strategy includes risk planning and risk management.
Project leaders and teams can identify risks that may
occur during the project and plan appropriate responses
if risks occur. Effective project management helps reduce
uncertainty and increase the chances of project success.
6. Reserves and Resource Allocation: Providing reserves
and allocating additional resources can help deal with
risks that cannot be fully avoided. For example, allocating
sufficient budget and manpower in a particular project to
deal with potential risks.
7. Crisis Response Plan: Formulating a crisis response plan
is a strategy for dealing with highly impactful and
unavoidable risks. The crisis response plan should
include measures to address the risks that occur quickly
and efficiently to minimize negative impacts.

It is important to choose a risk handling strategy that

best suits the type of risk and the needs of the organization

Risk Management and Insurance 133

or individual. Not all risks can be avoided completely, but by
implementing the right strategy, risks can be managed more
effectively and help achieve goals better.

4.5 Monitoring and Control.

Evaluate the effectiveness of risk management strategies
that have been implemented. The risk management
process does not stop after the risk handling strategy is
implemented. Monitoring and risk control is an
important stage to ensure the effectiveness of the
strategies that have been implemented. It is very
important to conduct regular monitoring of the risks
faced, verify whether the risk management strategy has
gone according to plan, and make adjustments and
improvements if necessary. Monitoring and controlling
risks are very important in maintaining the effectiveness
and sustainability of risk management. Steps that need
to be taken in monitoring and controlling risks:
1. Establish Key Performance Indicators (KPIs):
Determine the critical performance indicators that
will be used to monitor risks. These KPIs should be
relevant to the organization's objectives and able to

Risk Management and Insurance 134

 effectively measure the impact of the risk.
2. Setting Risk Tolerance Limits: Determine the risk
tolerance limit, which is the level of risk that is
acceptable to the organization. The risk limit should
be based on the risk analysis and the organization's
risk policy.
3. Periodic Risk Monitoring: Conduct regular risk
monitoring according to a predetermined schedule.
Monitoring includes identifying changes in the
context of the likelihood of risk occurrence, impact,
and the status of established risk response actions
should the risk occur.
4. Evaluation: Periodically re-analyze the risks to
ensure the relevance and accuracy of the previous
risk analysis. Evaluation can help in identifying new
risks that may arise during the project or activity.
5. Review Control Strategy: Review the risk control
strategy that has been established. Ensure that the
strategy is still effective in dealing with risks and
whether any changes need to be made based on
changes in the business environment.
6. Communication and Coordination: Always

Risk Management and Insurance 135

 communicate with all stakeholders involved in risk
management. Coordinate risk actions and responses
with relevant teams to ensure continuity and success
of risk control.

7. Plan Corrective Action: If a risk exceeds the risk

tolerance limit or the control strategy is not effective,
take corrective action immediately to address the issue.
Identify the necessary corrective measures and
preventive actions so that similar risks do not
reoccur in the future.
8. Revise and Update the Risk Management Plan:
The organization should adjust and update the risk
management plan based on the results of risk
monitoring and evaluation. Ensure that this plan is
always relevant and up to date in the face of risk-
related challenges.
9. Learn from Experience: Learn from past
experiences in dealing with risks and the response
actions that have been taken. Refer to lessons learned
to improve future risk management processes.

Risk Management and Insurance 136

 Monitoring and controlling risk is an ongoing process
that requires consistent attention and dedication from
the entire organization. By carefully performing these
steps, organizations can deal with risks more effectively
and better achieve goals. By understanding and applying
the risk management process systematically, students
will have the essential skills to face and address risks in a
variety of situations, whether in the personal, business,
organizational, or public sector. An effective risk
management process will help them make smarter
decisions, reduce uncertainty, and face the future with
more confidence.

Summary.
The risk identification process is the first step in risk
management that aims to identify potential risks that could
affect a specific goal or project. Summary of the risk
identification process:

a) Risk Identification Team: Form a team or group

consisting of various stakeholders involved in the project.
A diverse team will help in looking at the risks from
different perspectives.

Risk Management and Insurance 137

b) Gather Information: Gather information about the project
or work being undertaken. Include historical data,
reports, documentation, and involve various relevant
parties to understand the situation of the business
environment and relevant conditions.
c) Identify Sources of Risk: Identify various potential
sources of risk that may affect the project or objectives.
Sources of risk can come from various aspects, such as
technology, environment, finance, law, and human
actions.
d) Identify Risk Types: Identify the types of risks that may
arise from each identified risk source. For example,
financial risk, market risk, reputation risk, technology
risk, and so on.
e) Risk Identification Methods: Use risk identification
methods and tools, such as SWOT (Strengths, Weaknesses,
Opportunities, Threats) analysis, Brainstorming, Business
Process Analysis, or Fault Tree (FT) analysis.
f) Scale and Impact of Risk: Consider reviewing the scale
and impact of potential risks. Risk identification may
involve ranking risks based on impact severity and
likelihood of occurrence.

Risk Management and Insurance 138

g) Risk Register: Create a comprehensive list of identified
risks along with risk descriptions and classifications.
h) Verification with Stakeholders: Verify the risk register
with stakeholders to ensure that all significant risks are
identified and mutually understood.
i) Documentation of Results: Record/document any results
of risk identification, including risk register, risk analysis,
and risk rating. The documentation will be the basis for
performing the next steps in risk management.

The risk identification process is a critical step that

enables an organization to recognize potential risks that
might affect a goal or project. Through this process,
organizations can be better prepared to deal with
uncertainties and plan appropriate responses in risk
management.

Practice Essay Questions.

1. Explain the steps in the risk identification process in risk
management. Why is the risk identification process an
important first step in risk management?

Risk Management and Insurance 139

2. What is risk analysis in risk management? Describe the
methods that can be used in risk analysis, and how risk
analysis helps to better identify and manage risks.
3. Discuss the strategies that can be used to reduce or avoid
risk in risk management. Give a concrete example of each
strategy and explain how it can help an organization deal
with uncertainty.
4. How does risk monitoring and control help in risk
management? Explain the steps that need to be taken in
monitoring and controlling risk, and why monitoring and
controlling risk is an ongoing process.

5. Explain the relevance of risk management for students,

entrepreneurs and organizations. Discuss why an
understanding of risk and the application of risk
management is of key importance in achieving goals and
success in various life contexts.

Practice multiple choice questions.

1. The risk management process is a systematic step in
identifying, analyzing, and managing risks to achieve
organizational or project goals. The initial steps in the risk

Risk Management and Insurance 140

 management process are:
a. Risk evaluation.
b. Risk identification.
c. Risk mitigation.
d. Risk transfer.
2. Risk analysis in risk management involves:
a. Allocate additional resources.
b. Identify sources of risk.
c. Reduce the impact of risk.
d. Assess the impact and probability of risks.
3. A risk management strategy that involves purchasing
insurance policies to transfer risk is called:
a. Risk mitigation.
b. Risk diversification.
c. Risk transfer.
d. Risk aversion.
4. The next step after risk identification in risk management
is:
a. Formulate risk control strategies...
b. Assess the impact of the risk.
c. Diversify the investment portfolio.
d. Allocate additional resources

Risk Management and Insurance 141

5. The risk monitoring and control process is carried out to:
a. Prevent risks from occurring...
b. Risk aversion.
c. Monitor and mitigate the impact of risks.
d. Transferring risk through insurance.
6. One method of risk identification that involves
collaborative sessions to freely generate ideas is:
a. SWOT Analysis.
b. Fault Tree Analysis (FT).
c. Brainstorming Analysis
d. Qualitative Analysis

7. The risk management process is a continuous process

because:
a. Risks always dissipate over time.
b. The impact of risk never changes.
c. The business environment is always static.
d. Risks and situations change over time.
8. The main objectives of risk analysis are:
a. Making decisions based on feelings
b. Eliminate all risks.
c. Identify potential risks.
d. Understand the impact and probability of risks.
Risk Management and Insurance 142
9. The risk identification process involves identifying:
a. Possible positive impacts.
b. Risks that have occurred in the past.
c. Potential risks that may affect the objectives.
d. Risks that are not relevant to the objectives.
10. Why is the risk management process important to an
organization or project?
a. For the organization to always be profitable.
b. To avoid uncertainty.
c. For each risk to be completely eliminated.
d. To identify and manage risks that may affect objectives
or projects.
These questions can help improve your understanding of the
Risk Management Process and better prepare you for the
challenges of uncertainty. Happy learning!
Answer keys for 12 multiple-choice questions:
1. Answer: b. Risk identification.
2. Answer: d. Assess the impact and probability of the risk.
3. Answer: c. Risk transfer.
4. Answer: a. Formulate a risk control strategy.
5. Answer: c. Monitor and reduce the impact of risks.
6. Answer: c. Brainstorming analysis.
7. Answer: d. Risks and situations change over time
Risk Management and Insurance 143
8. Answer: d. Understand the impact and probability of
risks.
9. Answer: c. Potential risks that may affect
Objective.
10.Answer: d. To identify and m a n a g e
risks that may affect the objectives
or project.
Hopefully this answer key will help you in evaluating your
understanding of the Risk Management Process. If you have
any further questions, don't hesitate to ask the lecturer!

Risk Management and Insurance 144

 CHAPTER V. RISK MANAGEMENT TOOLS AND
TECHNIQUES

In this Chapter, students and readers will be

introduced to various tools and techniques used in Risk
Management (MR). MR tools and techniques aim to assist in
identifying, analyzing, and managing risks in a more detailed
and systematic manner.
Risk management tools and techniques are necessary
because risk is an integral part of business activities and
everyday life. Uncertainty and risk are always present in
every decision and action taken. Effective risk management
is the key to achieving goals sustainably and avoiding
unwanted losses. Some reasons why risk management tools
and techniques are necessary:
1. Risk Identification: Risk management tools and
techniques help organizations identify various risks
they may face. Without proper risk identification,
organizations are unaware of the potential negative
impact of risks and find it difficult to take necessary
preventive or control measures.
2. Evaluate Impact and Probability: Risk management
tools and techniques help in assessing the impact and
Risk Management and Insurance 145
 probability of occurrence of risks. With a good
understanding of impact and probability, organizations
can prioritize the most critical risks and allocate
resources to deal with risks.
3. Informed Decision Making: The information provided
by risk management tools and techniques enables better
decision making. Recognized and quantifiable risks
become important considerations in taking strategic
steps and operational activities.
4. Proactive Risk Management: Risk management tools
and techniques enable organizations to deal with risks
proactively. By recognizing risks early, organizations
can design effective risk management strategies before
they become serious problems.
5. Avoiding Losses and Improving Efficiency: By using
risk management tools and techniques, organizations
can identify risk opportunities and avoid potential
losses. Operational efficiency can be improved as well-
managed risks can help reduce uncertainty and costs
associated with those risks.
6. Regulatory and Standards Compliance: There are
certain regulations and standards that require

Risk Management and Insurance 146

 organizations to perform effective risk management.
Risk management tools and techniques can help
organizations to comply with applicable requirements
and regulations.

Risk management tools and techniques are essential

instruments in helping organizations identify, assess, and
manage risks effectively. With sound risk management,
organizations can better achieve their objectives, reduce
potential losses, and increase resilience in the face of
uncertainty in an ever-changing business environment.
Some commonly used tools and techniques in risk
management:
1. SWOT Analysis: Analysis of Strengths, Weaknesses,
Opportunities, and Threats. SWOT analysis is a useful
method to understand the position and condition of an
organization, project, or individual in facing risks and
opportunities from internal factors (strengths and
weaknesses) and external factors (opportunities and
threats). By understanding these factors, students can
identify risks and know better the potential.
2. Sensitivity Analysis: Sensitivity analysis is a technique

Risk Management and Insurance 147

 for measuring how sensitive the outcome or performance
of a project, investment, or decision is to changes in
certain variables. In risk management, sensitivity analysis
helps in understanding how changes in the value of
certain variables can affect the final outcome. It helps
students to understand the risks associated with
uncertainty in the values of variables used in planning
and decision-making.
3. Scenario Analysis: Involves creating various alternative
scenarios that may occur in the future and identifying
how risks and opportunities will change under each
scenario. By understanding the implications of various
scenarios, students can anticipate and plan responses to
different situations in risk management.
4. Mathematical & Statistical Models for Risk
Management: In complex risk management,
mathematical and statistical models are often used to
measure and predict risk. For example, mathematical
models such as Value at Risk (VaR) are used to measure
financial risk, while statistical regression analysis can
help identify correlations and relationships between
variables that affect risk.

Risk Management and Insurance 148

 5. Cost-Benefit Analysis: An analysis that involves
comparing the costs and benefits of a project. A cost-
benefit analysis will help in evaluating whether the cost
of reducing the risk is worth the benefits that will accrue
from the risk reduction.
6. Probability and Statistical Techniques: The use of
probability and statistical techniques is important in risk
management (MR), to quantify the level of uncertainty
and formulate risk forecasts. Probability distributions
and statistical methods such as regression analysis and
correlation analysis are used to evaluate historical data
and forecast future risks. There are several other
approaches in risk management (MR) that evolve with
time and changes/needs. Students will learn how to
effectively use MR tools and techniques to identify risks,
evaluate impacts, and make decisions in dealing with
risks.

By understanding risk management tools and techniques,

students will be able to improve the quality of their decision-
making and better manage risks in various situations and
sectors of life.

Risk Management and Insurance 149

 CHAPTER VI. CASE STUDY

Risk management case studies in sectors (business,

finance, banking, insurance) discuss how to handle risks and
deal with risks in these case studies including risk analysis,
risk evaluation and solutions to be carried out related to risk
management. Some interesting case studies that can be of
interest and material for consideration include:

6.1 Silicon Valley Bank (SVB) Case Study.

SVB Bank is a large bank in the United States that has been
operating for decades and has a wide customer base. In the
beginning, SVB Bank was known as one of the most trusted
banks with stable performance. According to economists
reported by Bisnis.com, SVB's collapse appears as an irony,
because before being declared bankrupt, SVB was listed as
one of the best banks in the United States (US) in March 2023
by Forbes Magazine. SVB Financial Group is ranked 20th in
the list of the best banks in the US with assets reaching US $
213 billion or Rp.3,302.04 Trillion (exchange rate
Rp.15,502). Return on Equity (ROE) of 13.8 percent with
non-performing assets of only 0.05 percent, being one of the
best banks in the US. However, SVB's financial foundation
Risk Management and Insurance 150
was unable to withstand the liquidity shock. SVB collapsed
after the bank's shares fell a significant 66% and failed to
raise an additional US$2.25 billion. SVB was closed by
financial authorities in California, USA on Friday, March 10,
2023.
Errors that Occur:
The bankruptcy of SVP Bank occurred due to a series of
mistakes that accumulated from various aspects, namely:
1. Credit Abuse: SVB Bank provided excessive credit to
some customers without conducting risk analysis in
accordance with the Standard Operating Procedure. This
led to an accumulation of non-performing loans that
could not be recovered.
2. Portfolio Diversification: SVB Bank held investment
portfolios in certain sectors without conducting adequate
investigations so that when these sectors experienced
difficulties, the bank's portfolio became very vulnerable.
3. Insufficient Capital and Poor Financial Management:
SVB Bank did not have sufficient capital reserves to deal
with uncertainties and respond to performance
downturns. In addition, poor financial management led to
wastage and misuse of funds.

Risk Management and Insurance 151

4. Not Implementing Risk Management Functions: One of
the key factors in SVB Bank's insolvency was the inability
to implement an effective risk management function. SVB
Bank failed to identify, analyze, and manage the risks it
faced, and as a result, these risks developed without
proper supervision.

Risk Analysis.
If SVBs have conducted adequate risk analysis, they may be
able to identify potential risks. Proper risk analysis will
assist banks in evaluating the likelihood of risks occurring
and their impact on business performance and
sustainability.

Risk Evaluation.
Risk evaluation is the next step after risk analysis. In this
regard, SVBs should assess the tolerable level of risk and
identify the steps that need to be taken to manage the risk.
Effective risk evaluation will assist the bank in planning
appropriate response actions to mitigate the impact of risks.

Risk Management and Insurance 152

Solution.
To prevent SVB bankruptcy, some steps that can be taken
include:
1. Improving the Risk Management Function: SVB
should strengthen its risk management function by
engaging qualified professionals who have a deep
understanding of financial and operational risks.
2. Portfolio Diversification and Investment
Management: SVB must diversify its investment
portfolio to reduce risk exposure to certain sectors. SVB
should have a professional and capable investment
management team to monitor and manage the portfolio
more effectively.
3. Strict Credit Supervision: SVBs should implement strict
credit policies and conduct comprehensive risk analysis
before extending credit to customers. This will help
avoid non-performing loans.
4. Capital Raising and Prudent Financial Management:
SVBs should raise capital to increase resilience to risks
and avoid capital shortfalls. In addition, SVBs should
improve financial management to reduce waste and
increase efficiency.

Risk Management and Insurance 153

5. Crisis Plan Development: SVB should develop a
detailed crisis plan to deal with emergency situations,
including a possible "Bankrupt" scenario. The crisis plan
should include replacing incompetent managers and
discontinuing products as well as covering all necessary
measures in case of negative bank performance.

By implementing the above measures and strengthening

risk management, SVB Bank has the opportunity to avoid
bankruptcy and deal with uncertainties.

6.2 Diamond Offshore (OilCo) Case Study.

In 2020 Diamond Offshore (OilCo), an Oil & Gas company in
the United States, filed for bankruptcy. The company has
experienced business pressure for 4 (four) years since 2016,
further exacerbated by the condition of oil prices that have
dropped dramatically amid the spread of Covid-19. Diamond
Offshore (OilCo) is an oil company with a network of
representative offices in Australia, Brazil, Mexico, Norway,
Scotland and Singapore with 2,500 employees. The
company's financial condition continues to be negative and
in 2019 was minus US$357 million. Over the past five years,

Risk Management and Insurance 154

the company posted a total loss of US$1.2 billion. Quoting
CNN.com, on April 28, 2020, Diamond offshore (OilCo) had
long-term debt of US$2 billion as of December 31, 2019
while the remaining cash at the company was only US$156
million, so OilCo was under serious financial pressure and
eventually faced bankruptcy.
Errors that Occur:
Various factors led to OilCo's bankruptcy, namely:
1. Low Oil Prices: OilCo relies primarily on revenue from
oil and gas sales. However, over the past few years, global
oil prices have experienced a sharp decline, which has
negatively impacted the company's revenues and profits.
2. Inability to Adjust Operating Costs: Despite falling oil
prices, OilCo was unable to effectively adjust its operating
costs. High operating costs led to shrinking and even
negative profit margins, causing a financial deficit.
3. Low Operational Efficiency: OilCo has failed to improve
the efficiency of its operations in the face of changing oil
prices. Inefficient production processes led to high
production costs, worsening the company's financial
situation.

Risk Management and Insurance 155

4. Not Implementing Risk Management Functions: One
of OilCo's biggest mistakes was the Company's inability to
carry out an effective risk management function. OilCo
failed to identify and manage the risks it faced, and did
not have adequate plans and responses to deal with the
decline in oil prices amid the Covid-19 outbreak.
Risk Analysis:
If OilCo conducts a proper risk analysis, it will be able to
identify potential risks it faces, such as the risk of low oil
prices and operational risks. A comprehensive risk analysis
will assist OilCo in planning the necessary actions to address
these risks.
Risk Evaluation:
The next step is to conduct a Risk Evaluation. OilCo must
assess the level of risk it can tolerate and identify the steps
it needs to take to manage that risk. A proper risk evaluation
will help OilCo in planning cost and efficiency adjustment
measures.
Solution:
To prevent bankruptcy, some steps OilCo can take include:

1. Portfolio Diversification: OilCo should strive to

diversify its business portfolio, so that it is not dependent

Risk Management and Insurance 156

 on oil and gas sales. The search for alternative sources of
revenue, such as renewable energy, can help reduce risk
exposure.

2 Operating Cost Reduction: OilCo should make efficient

and targeted adjustments to operating costs. Identify
wasteful areas and streamline production processes to
improve margins.

3 Effective Risk Management: OilCo should establish a

competent risk management team to better identify and
manage risks. Implementing appropriate risk
management strategies and having response plans for
various scenarios are important steps in dealing with
uncertainties.

4 Innovation and Research: OilCo should invest in

innovation and research to improve operational
efficiency, discover new technologies, and diversify the
business.

5 Collaboration with Stakeholders: Involving

stakeholders such as investors, business partners, and
employees in the change and restructuring process helps
OilCo gain support and approval for the steps taken.

Risk Management and Insurance 157

 By implementing these measures and strengthening risk
management, OilCo has the opportunity to avoid
bankruptcy and overcome the challenges faced in the
challenging oil and gas industry.

6.3 Case Study of PT Wanaartha Life.

Wanaartha Life Insurance Company (WAL) is a life insurance
company. The company has been operating for decades and
has a good reputation in providing reliable insurance
services. However, in recent years, WAL experienced serious
financial pressure and eventually faced bankruptcy, so the
Financial Services Authority (OJK) announced the
revocation of the business license of PT Asuransi Jiwa
Adisarana Wanaartha (WAL). This revocation was carried
out because WAL could not meet the solvency ratio (risk-
based capital) set by OJK in accordance with applicable
regulations.
OJK said that the license revocation was due to PT WAL's
inability to cover the difference between liabilities and
assets, through capital deposits by controlling shareholders
or inviting new investors. "The high difference between
liabilities and assets is an accumulation of losses due to the

Risk Management and Insurance 158

sale of similar saving plan products," in the OJK's official
statement, on Monday, 5/12/2022.
OJK stated that PT. WAL sold products with returns that
were not matched by the company's ability to get results
from managing its investments. PT WAL engineered
financial statements that did not match the actual conditions
(Fraud).

Faults that Occurred: Several factors led to the bankruptcy

of PT WAL, including:
1. Inaccurate Risk Assessment: WAL failed to conduct an
accurate risk assessment of their insurance portfolio.
They may have overlooked significant risks or not taken into
account the possibility of large losses.
2. Unprudent Underwriting Process: The company does not
perform good prudent underwriting, meaning that the
company accepts insurance premiums from customers
without carefully considering the risks that will be faced.
3. Insufficient Capital: WAL faced issues with insufficient
capital to bear the huge risks it faced. This led to the
Company's inability to pay claims submitted by
customers.

Risk Management and Insurance 159

4. Poor Investments: Poor investments or inappropriate
investment strategies lead to a decline in the value of the
company's portfolio and cause financial problems.
5. Not Implementing Risk Management Functions: One of PT
WAL's major mistakes was the inability to implement an
effective risk management function. The company failed
to properly identify and manage risks, and lacked
appropriate mitigation strategies.

Risk Analysis:
If PT. WAL has conducted a proper risk analysis and
immediately improves its financial performance, it will be
able to identify potential risks faced, such as the risk of less
stringent underwriting, the risk of poor investment, and the
risk of capital inadequacy. A comprehensive risk analysis
will assist the company in planning the necessary actions to
overcome these risks.
Risk Evaluation:
Risk evaluation is the next step after risk analysis. In this
case, PT WAL must assess the level of risk that can be
tolerated and identify the steps that need to be taken to
manage the risk. Proper risk evaluation will assist the

Risk Management and Insurance 160

company in planning adjustment measures and
strengthening financial capacity.
Solution:
To prevent bankruptcy, some steps may be taken by WAL
include:
1. Improved Risk Assessment: PT WAL should strengthen
its risk assessment process and implement Good
Corporate Governance (GCG).
2. Strict Underwriting: The company should apply strict
and careful underwriting policies to ensure the risks
taken are in line with the company's financial capacity.
3. Prudent Investment Management: PT WAL should
conduct more prudent investment management and be
careful in choosing investment instruments to avoid
potential large losses.
4. Capital Strengthening: Companies should look for ways
to increase their capital and financial capacity to be
better able to deal with major risks.
5. Effective Risk Management Implementation: WAL
should establish a competent risk management team
and implement appropriate risk management strategies
to better identify, measure, and manage risks.

Risk Management and Insurance 161

Through these measures, PT WAL has the opportunity to
avoid bankruptcy and overcome the challenges it faces.

Summary.
The case studies of the bankruptcy of SVB, Diamond
Offshore (oilCo) and Wanaartha Life Insurance company,
show the importance of effective risk management in
maintaining business continuity and preventing bankruptcy.
All three companies experienced serious financial stress due
to neglecting risk management and not implementing
proper risk management principles.
In the SVB case study, the bank faced bankruptcy due
to mistakes such as credit abuse, lack of portfolio
diversification, and poor financial management. Failure to
carry out effective risk management functions, including
proper risk analysis and comprehensive risk evaluation,
affected the bank's ability to deal with market uncertainties
and changes.
The case study of the company OilCo shows how
important risk management is in the face of oil price
fluctuations. The company failed to adjust operating costs
and improve o p e r a t i o n a l efficiency, and did not

Risk Management and Insurance 162

implement effective risk management in the face of oil price
uncertainty amid Covid-19. As a result, the company faced
serious financial pressure and struggled to survive in a
challenging industry.
What happened in the case of the insurance company
PT WAL highlighted errors in risk assessment, less rigorous
actuary functions and underwriting processes, and capital
inadequacy. The company suffered losses because it was
unable to identify and manage risks properly. Not
implementing risk management, even though accurate risk
analysis and careful risk evaluation can help companies face
challenges and reduce the impact of market changes.
Overall, the above case studies confirm that large
companies can face the risk of bankruptcy if they do not pay
attention to risk management and ignore Good Corporate
Governance (GCG) on an ongoing basis. Effective risk
management is the key to identifying, measuring, and
managing risks properly, so that companies can continue to
adapt to changes in the business environment and achieve
long-term sustainability.

Risk Management and Insurance 163

Practice Essay Questions.
1. Name and Explain from a risk management perspective, why
did SVB go bankrupt?
2. Name and Explain from a risk management perspective, why
did Diamond Offshore (OilCo) go bankrupt?
3. Name and explain from a risk management point of view,
why did the insurance company PT Wanaartha Life (WAL)
go bankrupt?
4. What are the lessons and learnings that can be used as
examples so that companies and organizations can survive
and sustain in the contemporary and competitive era?
Explain!
5. Make a Case Study Group, to see and study several life
insurance companies that almost bankrupt and stop their
operating licenses by the Financial Services Authority (OJK)
and summarize the important points of the failure of
management carried out by the management of the life
insurance company in question.

Give a detailed and comprehensive answer, complete with

theoretical basis. Good luck with the assignment!

Risk Management and Insurance 164

 CHAPTER VII. ETHICS & RESPONSIBILITY
IN RISK MANAGEMENT

Section seven of the book "Risk Management and

Insurance" discusses the role of ethics and responsibility in
risk management. Ethics is a set of moral principles and
values that govern the behavior and actions of a person or
organization. On the other hand, responsibility refers to the
obligation to act in accordance with moral values and
principles and to be accountable for any actions taken.

7.1 The Role of Ethics in Risk Management.

Ethics plays an important role in risk management
because risk is not always related to financial aspects alone,
but can have an impact on moral values, integrity and
reputation. In dealing with risk, companies or individuals
must consider the ethical implications of their actions. Ethics
helps in determining whether the action or strategy taken is
right or wrong, fair or unfair, and in accordance with the
values held.
7.2 Ethical Decision Making in Risk Management
In risk management, decisions must be based on

Risk Management and Insurance 165

ethical considerations. Ethical decisions not only take into
account financial impacts and interests, but also
stakeholders, such as employees, customers, communities
and the environment.

Ethical practices help in avoiding harmful/immoral

operational activities, such as manipulation of information,
falsification of reports and bribery.

7.3 Social Responsibility in Risk Management.

Risk management is linked to social responsibility,
which is the awareness and commitment to act in the
interests and welfare of society at large. In the face of risk,
companies or individuals must act by considering the social
impact of decisions and actions taken.

Social responsibility calls on organizations to avoid

actions that may harm the environment, create social
inequalities, or disregard human rights.
7.4 Ethical Principles in Risk Management.
Some ethical principles in risk management include:
a. Stakeholder interests: Taking into account the interests
and welfare of stakeholders in risk decision-making.
b. Transparency: Communicating information honestly and

Risk Management and Insurance 166

 openly to all risk-related parties.
c. Integrity: Conducting activities with integrity and
honesty in accordance with the principles of Good
Corporate Governance, avoiding conflicts of interest, and
following applicable rules and regulations.
d. Accountability: Taking responsibility for every decision
and action taken and accepting the consequences.

7.5 Fairness: Assessing risks fairly and providing equal

treatment for all parties involved. Maintain
Reputation and Trust.

Ethical and responsible risk management helps

organizations maintain the reputation of the company or
individual and build trust with stakeholders. A good
reputation and customer trust are important assets in
creating the long-term success of an organization or
company.
In this section, students and readers are invited to
consider the social and moral impact of decisions and
recognize the ethical implications in various risk situations.
By strengthening the understanding of ethics and
social responsibility in risk management, students are

Risk Management and Insurance 167

expected to become thoughtful leaders with integrity and
responsibility in dealing with risk and managing the
complex aspects of life and business.

Group Assignment.
Each group of 3 (three) people was given the task to create
an "article" with the theme "Risk Management and
Insurance".
The format of the article starts with Abstract, group name
and members. Chapter 1. Introduction, Background,
Research Objectives. Chapter 2. Theoretical Foundation.
Chapter 3 Research Methodology. Chapter 4 Discussion and
Results and Chapter 5 Conclusion. The article must be at
least 15 (fifteen) pages, closed with a bibliography or
references.
The maximum time for working on the article is 15 (fifteen)
days after this material is given by the Lecturer / Teacher.

Risk Management and Insurance 168

 CHAPTER VIII. CONCLUSIONS

This book is a comprehensive guide designed to

provide an in-depth understanding of the concept of risk
management and the important role of insurance in
protecting oneself from various risks that may be faced in
everyday life.
Amidst continuous change in a complex globalized
world, risk has become an integral part of every aspect of
life. From accidents and natural disasters to financial and
business risks, the challenges of identifying, analyzing and
managing risks are increasing. This book is intended for a
wide range of readers, from students who are interested in
understanding the concepts of risk management and
insurance, to professionals who want to deepen their
knowledge of the insurance industry and risk management.
Readers get an introduction to the basics of risk
management, including risk identification methods, risk
impact assessment, and effective mitigation strategies as
well as the basics of insurance. The book also discusses the
important role of insurance in helping us protect our assets,
health, and financial future. Of course, the journey through

Risk Management and Insurance 169

this topic will not be separated from technological
developments and innovations in the insurance industry.
We will discuss how technology and finance have affected
the way risk is managed and provide more sophisticated and
responsive insurance services.
Introduction to Risk Management is the first part of
this book that aims to provide readers with an overview and
basic understanding of the concepts of risk and risk
management. Risk management is a systematic approach
that aims to identify, analyze, measure, and manage risks in
order to achieve the desired goals.
In today's uncertain and complex environment, risk
management is becoming increasingly important for
organizations and individuals. Unexpected events, market
changes, and new threats can have a major impact on the
overall performance and viability of an entity. Therefore, the
introduction of risk management is a crucial first step in
facing future challenges more confidently and responsively.
The purpose of risk management is to identify risks
that may be faced, measure the level of risk, and plan
appropriate mitigation strategies and actions to reduce or
manage the negative impact that could occur.

Risk Management and Insurance 170

 Risk management covers various facets or
aspects of life and business, including the financial sector,
industry, health, environment, technology, and even in
personal decision-making. In an ever-changing and
unpredictable world, the ability to manage risk well is key to
achieving long-term success and sustainability.

In practice, risk management involves steps such as

identification of potential risks, evaluation of their
likelihood of occurrence, measurement of their likely
impact, and planning of mitigation strategies to deal with
them. The use of data analysis tools and techniques, risk
modeling, and risk management software also helps
organizations in identifying and managing risks efficiently.

In addition, risk management also includes effective

communication to stakeholders to ensure a common
understanding of risks and the steps taken to manage them.
As the world becomes increasingly complex and
globally connected, risk management also faces new
challenges. Technological changes, geopolitics, climate
change, and pandemics are some examples of events that
have highlighted the importance of effective risk
management. Therefore, it is important for organizations to
Risk Management and Insurance 171
have an adaptive and innovative approach in dealing with
evolving risks. In this regard, understanding and
implementing risk management is key in ensuring
organizational sustainability and success amidst ongoing
uncertainty and change.
This book explains the history of risk management,
the development and evolution of the concept of risk
management over time. Risk management in the world has
been practiced since ancient times. The ancient Egyptians,
Babylonians, and Romans had systems or ways that
resembled insurance practices and simple risk management
practices to protect wealth by having emergency funds and
developing strategies to protect trade from maritime risks
and crop losses.
Although the concept of modern risk management as
we know it today did not exist, ancient civilizations had
systems or practices similar to certain aspects of risk
management.
The Middle Ages and the Imperial Period In the
Middle Ages, the practice of risk management grew. During
the imperial period in Europe, merchants and sailors
experienced high risks in conducting expeditions and

Risk Management and Insurance 172

trading between countries so merchants formed
associations to share risks. This practice became the
forerunner of the modern insurance system.
In the Middle Ages and Imperial Europe, there were
several activities that resembled risk management practices,
especially in the trade and marine sectors. Although the
modern concept of risk management was not fully formed,
these practices reflected an awareness of the importance of
dealing with uncertainty and protecting property.
Merchants and seafarers faced high risks on long-
distance voyages due to the possibility of natural disasters,
pirate attacks, and losses en route. To deal with these risks,
merchants and sailors formed trade associations, such as the
Hanseatic League, which provided collective protection and
shared risks.
As maritime trade developed, the practice of marine
insurance was introduced. Ships and cargo were insured to
protect against the risk of loss or damage due to marine
disasters, robbery and other calamities.
The concept of marine insurance reflects efforts to
share risks and prevent bankruptcy due to large losses in
maritime trade.

Risk Management and Insurance 173

 Agriculture Agriculture remained the main sector of
the economy back then. Farmers faced risks from weather
changes, crop disease outbreaks, and other disruptions.
Practices such as crop diversification and crop storage were
employed to reduce the risk of famine and loss.

Leadership and Security Practices leaders make

decisions in the face of risks from enemy attacks, rebellions
and natural disasters. War strategies, defense strategies, and
security planning were used to deal with these risks.
The development of risk management occurs in line
with advances in science, technology and business practices.
The Industrial Revolution in the 18th and 19th centuries,
brought significant changes in business and industry. The
development of technology, global trade, and transportation
led to increased risks in various sectors making the
insurance industry begin to develop.
The first insurance companies were established,
such as Lloyds of London in England in 1688, which offered
ship and cargo insurance. During this period, risk
management practices became more formalized and
structured, with insurance companies providing insurance
policies to protect against the risk of loss. With the growing

Risk Management and Insurance 174

insurance industry, individuals and companies can transfer
risks to insurance companies as a mitigation measure.
The insurance industry develops insurance policies
that contain terms and conditions governing the extent of
insurance coverage, premiums, claim payments, and others.
The preparation of an insurance policy is an important step
in communicating the risks borne and the rights and
obligations of the parties involved.
The development of the interrelated insurance and
banking industries has led to the development of financial
management practices, such as credit risk management,
investment management, and liquidity management. These
practices help insurance companies manage financial risks
and ensure long-term financial stability.
Insurance Companies conduct periodic risk
evaluations to ensure insurance policies remain relevant
and in accordance with market conditions and risks.
Business Planning Risk management is an important part of
business planning. Insurance companies and other business
companies integrate risk analysis in strategic planning to
identify opportunities and threats that may affect future
business success. The development of risk management

Risk Management and Insurance 175

continues today with technological advances and
increasingly sophisticated data analysis.
In the 20th century, the science of risk management
underwent rapid development, particularly in two main
areas, namely Corporate Risk Management and Financial
Risk Management. This development was triggered by
global events such as the World Wars, and significant
financial events, as well as the emergence of technological
advances that had a major impact on how risk was managed.
The emergence of the concept of Enterprise Risk
Management (ERM) was a major breakthrough in
corporate risk management. ERM is a holistic and integrated
approach to managing all types of risks faced by a company,
including operational risk, financial risk, strategic risk,
compliance risk, and reputational risk.
ERM helps companies identify interconnected risks
and manage risks efficiently and effectively. ERM is a holistic
and integrated approach to managing all risks faced by an
organization.

The ERM approach is designed to help organizations

identify, assess, and manage risks that may affect the
achievement of objectives. ERM focuses on how to manage

Risk Management and Insurance 176

risks in a strategic and data-driven manner, so that
organizations can better deal with uncertainty and increase
success in achieving their goals. The key element of
Enterprise Risk Management (ERM) is Risk Identification.
The first stage in ERM is to identify risks that may be faced
by the organization.
Risk assessment helps organizations identify the
most critical risks and prioritize risk management efforts.
Risk Management Once risks have been identified and
assessed, the next step is to design a risk management
strategy. Risk management includes various actions to
reduce, transfer, or avoid risks, as well as making decisions
about risks that are acceptable or unacceptable to the
organization.
ERM Involvement and Responsibility involves all
levels of management and employees in the organization.
Each individual has the responsibility to manage risks in
their respective areas. The ERM process is not a separate
function, but must be integrated in all business processes of
the organization.
ERM processes should be connected to the
organization's strategic planning, budgeting, and decision-

Risk Management and Insurance 177

making processes. The main objective of Enterprise Risk
Management is to increase an organization's resilience to
uncertainty and help organizations achieve their goals more
effectively.
Policy and Procedure Development It is increasingly
important for companies to have clear policies and
procedures related to risk management. These policies
include procedures for identifying risks, assessing risks,
managing risks, and reporting risks to management and
stakeholders. Oversight and Corporate Governance and
corporate risk management have an impact on better
corporate governance.
Strict, continuous supervision and transparency in
risk reporting are important in maintaining the integrity and
sustainability of the company.
Financial Risk Management in managing investment risk
uses portfolio analysis and diversification techniques to
manage investment risk and optimize returns.
Credit Risk Management The financial industry is
increasingly focused on reducing the risk of non-performing
loans and minimizing the likelihood of default on the part of
borrowers. Derivatives and Financial Instruments The

Risk Management and Insurance 178

development of financial instruments such as futures
contracts helps companies protect themselves from price
and currency fluctuations and provides a more effective
hedging tool.
The development of financial risk management is
also influenced by increasingly stringent financial
regulations. Regulators are introducing requirements and
conditions to manage risk more effectively in the financial
industry.
From various literature that has been written by
experts, it is known that the practice of risk management has
existed since ancient times and has evolved over time in
various cultures and societies.

In the development of Risk Management in the

Modern Century, there are several organizations or
institutions that can be considered as pioneers or drivers in
the development of more structured and organized risk
management practices. Some of them are:
▪ The Institute of Risk Management (IRM).
▪ The Risk and Insurance Management Society RIM.
▪ The International Organization for Standardization ISO.

Risk Management and Insurance 179

▪ The Committee of Sponsoring Organizations of t h e
Treadway Commission COSO.
▪ The Basel Committee on Banking Supervision BCBS.

Along with economic development and globalization,

risk has become an integral part of the business
environment and life in Indonesia. Business risks, financial
risks, environmental risks, political risks, and other risks can
affect company performance, economic stability, and the
welfare of society.
The development of risk management in Indonesia
has progressed rapidly along with the awareness of the
importance of risk management in achieving business
objectives and maintaining financial stability. Some of the
factors that contribute to the development of risk
management in Indonesia are as follows The Indonesian
government has encouraged companies to implement risk
management by issuing related regulations and guidelines.
Financial Services Authority OJK as a financial regulator in
Indonesia has issued various regulations related to risk
management in the financial sector. As a financial regulator,
OJK has issued several regulations related to risk

Risk Management and Insurance 180

management for the financial sector.
The following are some of OJK's risk management
regulations in Indonesia, including POJK Number 44/POJK.
05/2020 concerning the Implementation of Risk
Management for Nonbank Financial Services Institutions.
These risk management regulations issued by OJK aim to
encourage financial institutions in Indonesia to adopt good
risk management practices and integrate risk management
as part of their operational activities. With these regulations,
it is expected that risks in the financial sector can be better
managed and help improve the resilience and stability of
Indonesia's financial system.
Education and training in risk management enables
students and practitioners to acquire the knowledge and
skills necessary to manage risk more effectively. The
insurance industry in Indonesia also contributes to the
development of risk management. Insurance is one form of
risk management tool commonly used by companies and
individuals.
The growth of the insurance industry has driven
awareness of the importance of protecting oneself from
financial and business risks. The development of

Risk Management and Insurance 181

information technology has strengthened risk management
capabilities. The use of data analysis tools and techniques
helps companies to identify risks more accurately and
design more appropriate mitigation strategies.
Companies are increasingly recognizing the
importance of corporate risk management in the face of
business uncertainty and complexity. Many companies have
established internal risk management functions, trained
Risk Managers and established the position of Risk
Management Director to coordinate and manage risks in the
organization.

The development of risk management in Indonesia

continues and is becoming an increasingly important part of
business operations and decision-making. Better awareness
and understanding of risk management has helped
organizations and companies in Indonesia to face challenges
and uncertainties more effectively, and achieve long-term
success.
In the contemporary era, risk management is not
only related to business directorates and finance divisions,
but is becoming important in other fields such as
environment, health, and technology.

Risk Management and Insurance 182

 Risk management continues to be a necessary
practice to protect value, achieve goals and create
sustainability for organizations around the world.
Uncertainty and Risk, refer to conditions in which
information or future outcomes cannot be precisely
predicted or ascertained.
Risk management involves the process of identifying,
analyzing, evaluating, and managing risks with the aim of
minimizing the negative impact of risks and maximizing
potential opportunities. At an organizational level, risk
management helps ensure that risks are identified early and
appropriate strategies are developed to mitigate their
negative impact.
It is important to understand the difference between
uncertainty and risk in the context of risk management.
Uncertainty is a state where we do not know what will
happen, while risk is the negative impact or potential loss
that can occur due to the uncertainty. Risk management
aims to reduce risks arising from uncertainty in an effective
and efficient manner.
This book is useful for students, business owners and
organizations seeking to protect businesses from the

Risk Management and Insurance 183

negative impact that uncertainty and risk can have. Knowing
and understanding the types of risks is essential in effective
risk management to minimize negative impacts and
maximize opportunities.
Good decision-making and appropriate risk
management strategies can help organizations deal with
uncertainty and better achieve goals.

Risk management is recognized as an effective tool in

dealing with uncertainty, protecting corporate value, and
improving organizational performance and sustainability
amid the challenges of a dynamic business environment.
Risk Management becomes very important in the face of a
world full of uncertainty and change.
Risk management related to protecting assets,
achieving goals, and maintaining the reputation of an
organization or company has been recognized and adopted
by experts and researchers in various fields.
Researchers in the field of risk management
continue to develop methods and best practices to meet
challenges with uncertainty and risk. By prioritizing risk
management, organizations can gain a competitive

Risk Management and Insurance 184

advantage, achieve individual and organizational goals and
face the future with a more optimistic level of confidence.
The relevance of Risk Management for students and
organizations is how students and organizations can
understand and apply the concept of risk management in
study and life in preparation for future challenges.
Companies need to understand financial risk management
to manage company finances, protect individuals and
society.
Risk management has a very important relevance for
students in various fields of study. By understanding the
risks associated with career choices, students can make
appropriate future plans and strategies to achieve their
career goals.
Risk management helps students analyze risks and
consider the consequences of their choices, so they can make
wiser decisions. Risk management helps individuals and
companies understand financial and other risks to make
smart decisions to plan for the future.
Students can use the principles of risk management
to create innovation and creativity in a task or project. By
identifying and managing risks, students can try out new

Risk Management and Insurance 185

ideas with the ability to deal with any eventuality. Risk
management is very relevant in the management of
coursework.
Students and organizations can use a risk
management approach to plan for and overcome challenges
that arise during the process of working on academic
assignments or projects. During their studies, students are
faced with a variety of academic, social and personal
challenges.
Risk management helps individuals, companies and
communities to face challenges with more confidence and
minimize the risk of negative impacts.
Overall, risk management is a valuable skill for
students, not only to face challenges in the academic
environment, but also to prepare themselves to face
challenges in the working world and real life after
completing their education.
By understanding and applying risk management
concepts, students and readers are expected to become
more effective, innovative and responsive in dealing with
uncertainty and risk in various aspects of life. Aamiin!

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