THE BASIC CONCEPT OF RISK

The Objectives :

1. The definition of risk2. The classification of risk3. Peril and hazard4. Methods of handling risk

What Is A Risk

A variety of terms and definitions, eg:1. Unexpected losses2. Deviations from the expected3. Events that are not profitable

Risk sizes also vary depending on the definition and characteristics of risk (eg standard deviation, probability, etc..)

The risk arises because there are conditions of uncertainty.Some degree of uncertainty 1. Level of uncertainty does not exist2. Level of objective uncertainty3. Level of subjective uncertainty4. Highly uncertainty

Fluctuations tend to increase from year to year, which increases uncertainty and risk.Why fluctuations tend to increase? There are several factors driving the increase in these fluctuations :1. globalization of the world2. liberalization of world3. Information processing is the faster, the faster the reaction of investors

The risk of a variety of species, ranging from riskaccidents, fires, the risk of losses, fluctuationsexchange rate, interest rate changes, and others.

One way to classify risk is to look at the types of risks, it could grouped into several dimensions:1. Pure risk versus speculative risk,2. Subjective versus objective, 3. Particular risk versus fundamental risk

Objective Risk Vs Subjective Risk

Objective RiskRelative variation between actual losses with losses estimated

Subjective RiskAssessment of uncertainty based on a person's mental state or opinion

Pure Risk Vs Speculative RiskPure risk (pure risks) is a risk where the likelihood of loss there, but there is no possibility of profit. So we talk about the potential downside to this type of risk. Examples :accidents, fires, and the like, flooding hit our house. Such an event would be detrimental to us. But the house stood in a certain place does not directly will bring certain advantages. If a fire or flood, in addition to affected individuals, society as a whole will also be harmed. Insurance usually deals more with pure risk.

Speculative risk is the risk that we expect the occurrence of losses and gains as well. The potential costs and benefits discussed in this type of risk. Examples business venture (In business activities, we expect to benefit, although there are potential losses)hold (buy) stock (we make a profit or also loss).

speculative risks can be called as a business risk. Losses due to speculative risk will harm a specific individual, but would benefit other individuals. Suppose a company suffered losses because penjulannya down, other companies will probably benefit from the situation. In total, the community is not harmed by the speculative risk.

Objective Risk Vs Subjective Risk

Objective risk is the risk that is based on the observation of objective parameters. For example, fluctuations in prices or rates of return of investment in the stock market can be measured by standard deviation, ie the standard deviation of stock returns is 25% per year. Risks associated with the subjective perception of one's risk. In other words, a person's mental condition will determine the level of the conclusion of certain risks. For example, the standard deviation for the same market return of 25%, two people with different personalities will have a different perspective. A conservative person would assume the risk of investing in the stock market is too high. As for aggressive, risk of investing in the stock market is considered not too high. Note that the two men look at the risk of the same objective, namely the standard deviation of return of 25% per year.

Fundamental vs Particular Risk

Fundamental Risk = risks affecting the macro economic conditions, or a large number of individuals / groupseg: Rapid inflation, massive layoffs, war, risk of natural disasters such as hurricanes, earthquakes, tsunamis, forest fires. The risk is felt by many people and caused property losses of high-value and deathParticular Risk = risks that affect only a few individuals only, not the whole communityExample: car theft, bank robbery

These differences is important because in most cases the government just pay attention and address the fundamental risk, for example through insurance / social security

Peril Vs Hazard

Peril = factors causing the loss / failure Eg. 1. In the event of a fire house, fire = peril

2. Cars damaged in the collision, the collision =peril

Hazard = conditions that led to (increasing the probability of) the occurrence of an event.The categorized of hazard :1. Physical Hazard = physical conditions that increase the probability of occurrence of an event Eg. Wires shorting increases the chances of fire

2. Moral Hazard = dishonesty of someone who can increase the frequency of losses Eg. Burn the inventory of unsold goods are insured resulted in the increasing number of insurance claims are not appropriate

Methods of handling risk

1. Avoid and prevent the occurrence of events that cause harm

2. Loss ControlThere are two ways to control the frequency of occurrence and impact of loss:Prevent lossFor example: the police to reduce the frequency of accidents, by ordering the use of motorcycle riders left lane, turn on the lights in the daytime.

Reducing the impact of lossesFor example: the department store to install a sprinkler system for extinguishing fires; plant was built by using anti-fire material to reduce losses, etc..

3. Retention = aware of the risks and devise a plan to cope with lossRetention is only applicable to high-frequency & severity of low-risk where the potential losses are relatively small

4. Insurance Non-TransferThe risk is transferred to another party but not the insurance company. Several methods of risk transfer, namely:a. Transfer through contractFor example: a customer to transfer the risk of damage to the store to buy television service contract, so the store is responsible for the entire cost of repairs after the warranty period runs out; the risk of price increases in the cost of building construction can be transferred to developers by applying the fixed price in the contractb. hedgingIs a risk transfer techniques unfavorable price fluctuations to speculators is by way of buying and selling futures contracts on an exchange.

5. Insurance