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THE ROLE OF INSURANCE AS A RISK MANAGER
ARIZONA STATE UNIVERSITY
IEE 454 - RISK MANAGEMENT
WEEK 7
6.1 INSURANCE DEFINITION:
Insurance in Law No. 2 of 1992 concerning insurance business is an
agreement between two or more parties, in which the insurer binds himself to
the insured, by receiving insurance premiums, to provide compensation to the
insured due to loss, damage or loss of expected profits or third party legal
liability that may be suffered by the insured, arising from an uncertain event, or
provide a payment based on the death or life of an insured person.
According to KUHD (Kitab Undang-Undang Hukum Dagang) Article
246, insurance or coverage is an agreement, in which an insurer binds himself
to the insured by receiving a premium, to compensate him for a loss, damage or
loss of expected profit, which he may suffer due to an uncertain event.
According to Prof. Mehr and Cammack insurance is a social tool to reduce risk,
by combining a number of units exposed to risk, so that their individual losses
can collectively be predicted.
Then losses can be borne together (Irham Fahmi 2016: 341).
In general, insurance is an institution established on the basis of
stabilizing business conditions from various risks that may occur, with the hope
that when the risk is transferred to the insurance party, the company becomes
more focused on running its business (Irham Fahmi 2016: 340).
In insurance there are several terms that must be understood, including
(Irham Fahmi 2016: 340):
1. An insurance policy is a consensual insurance or coverage
agreement, which generally must be made in writing in a deed
between the parties to the agreement.
2. The premium is the amount of money that must be paid every
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month as an obligation of the insured for his participation in
insurance.
3. An insurance claim is a formal request to the insurance
company, to request payment under the terms of the agreement.
4. The insured party (insured) who promises to pay the premium
money to the insurer at once or in installments.
5. The insurer promises to pay a sum of money (compensation) to
the insured party, at once or in installments if something happens
that contains an element of uncertainty.
From all the definitions above, we can understand that in the concept of
risk management in insurance companies, there are two parties that are the main
focal points, namely the insured and the insurer.
Where the insurer is an insurance company whose duty is to bear the
losses that arise, which of course is preceded by an agreement made, and the
insured is a customer who has been paying premium money to the insurer in
installments and discipline, where by submitting a claim made by the insured,
the insurer is obliged to check or assess how much damage arises or suffered by
the customer concerned.
For example, a car is insured by its owner, then has an accident, then the
car owner as a customer of an insurance company submits a claim to the
insurance company, and then the insurance officer will assess how much
damage is caused. On the basis of the assessment made, the insurance company
will process and replace the damage that occurs.
6.2 INSURANCE BENEFITS:
There are several benefits that can be received when a person or institution
enters insurance, namely (Irham Fahmi 2016: 341-34):
1. Insurance is able to act as a risk neutralizer. The definition of risk
neutralization is when the risk occurs and the longer it tends to get
bigger, the insurance with its various formats tries to be strong so that
the risk experienced by a company is not getting higher but can even be
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minimized until it can be eliminated. With the insurance institution, it is
hoped that the risk can be at the smallest point.
2. Insurance as a compensation party. A person who enters and registers as
an insurance customer is obliged to pay every month with the details
and costs of insurance claims determined in the agreement letter agreed
upon by both parties, namely the insurer and the insured. Insurance as a
risk insurer has a strict function that when the customer experiences
risks such as fire and the like in accordance with applicable needs, the
obligation to compensate for the agreed amount.
3. Reducing mental and physical torment for the insured party caused by
fear and worry.
4. Generate optimum production levels, price levels, and price structures.
5. Improving the competitive position of small companies. Insurance
increases competitive spirit, because without insurance, small
companies will face less effective competition against large companies.
6.3 RISK TRANSFER:
In general, there are two forms of risk transfer carried out by companies or
individuals, namely (Irham Fahmi 2016: 342):
1. Transferring risk to an insurance company. In this context, the company
registers itself with the insurance company. Registration to this
insurance company can be done in various forms, namely:
•
Insurance on objects owned by the company, for example
vehicles, machinery, buildings, computers, and others.
•
Life and health insurance, covering insurance carried out on
every employee who works in the company. So that when an
employee has a work accident or illness, the employee will get
cost coverage. For example, free medical treatment.
According to Herman Darmawi, if a company transfers risk to an
insurance company, then this company must pay a premium which can
be divided into two parts:
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•
Low aloance, which is the insurer's estimate of the insured's
expected loss.
•
Loading includes the cost of provit margin, and estimated
unexpected expenditure. This loading can be as high as 30%
- 40% of the premium. If the company intends to bear the
risk itself, it must consider whether it will be cheaper,
because it saves on premium payments.
2. Transferring risk to non-insurance companies. In this context, the
company will transfer some of the risks it will experience to other
companies. This can be done like:
•
The company will transfer a number of jobs to other parties,
because if done alone it is not expected to be maximized or
completed on time.
•
The company transfers some of its assets from money to tangible
assets such as land or buildings with the prediction of having
future provitable value.
•
Deposit a number of company valuables in a place that is
considered safe such as a "safety box" at the bank.
•
Diversify assets. Asset diversification is putting or owning assets
in different places. For example, companies with financial
holdings do not only focus on purchasing or owning one type of
asset, such as buying corporate bonds. Where in times of
economic crisis will cause Many companies are destroyed or shaken
and this results in the collapse of bonds in the market, as well as
companies selling bonds having problems paying bond interest so that
the expected profit from bond interest is not fulfilled.
6.4 BUSINESS SECTOR RISK INSURANCE:
When someone enters the insurance business sector or establishes an
insurance company, they will face several forms of risk that can occur, namely
(Irham Fahmi 2016: 343):
A. Problems when insurance claims occur and for the insurance
company must provide funds in accordance with what was agreed by
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both parties in the agreement, such as fire, death, accidents, and so
on.
B. If an insurance company opens an office in an area adjacent to a
volcano, tsunami disaster, and earthquake-prone, then in the event of
a volcanic disaster and so on it will be a problem because the
insurance claim that must be paid is not one or several companies or
individuals alone but is overall.
C. The insurance company will try to avoid accepting clients
(members) who try to insure products that have a high level of risk if
something unwanted happens. For example, the insurance company
avoids accepting insurance from traders in the area of book sellers,
cloth sellers, paper sellers, and others. Because in this type of shop
the goods sold are very easy to catch fire and if it burns it can
happen quickly. This is different from what happens in material or
building stores where the goods sold are not the type that can burn
quickly because most material stores contain cement, iron, wire, and
others.
D. Internally for insurance companies, the risks that occur are related to
acts of dishonesty by their employees. Action Dishonesty committed
by employees or what is commonly referred to as fraud (intentional
fraud) is an act that wants to take advantage personally without
thinking about the losses for the company as a whole. For example,
there is falsification of data on both purchases and sales and even
deposits made by customers who deposit a certain amount of money
every time.
E. Risks caused by dishonesty by the company's internal auditors.
When an internal auditor makes an audit report in dishonest
conditions, of course he has a certain purpose, such as he already
knows that if the report made explains the actual conditions, there
will be parties who are tarnished by their names and even further
have to be dismissed from their jobs. So that the person conducting
the internal audit contacts the party concerned and asks for a sum of
money or even the party with the problem directly contacts / comes
to the internal auditor to hand over a sum of money so that the
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problem is covered or not reported.
F. The risk of management decisions concerns the decision to allocate
funds that are not appropriate and unable to provide the expected
results. So that the return obtained should be in accordance with the
target, but it turns out to be outside the target especially if it is far
from the expected target, while the funds used from the results of
customers who deposit their insurance obligations. During this time
most insurance companies allocate their assets to forms such as
opening a supermarket business, property and real estate and so on.
Where with the hope that the selected asset allocation has the
following criteria:
•
Has a high turnover, or in other words, the goods sold are
fast and easy to sell.
•
Having a long-term profitability side, in the sense that profits
will continue to be received not only in the short term but
also in the long term.
•
Away from systematic risk (market risk). Systematic risk is
risk that cannot be verified or in other words risk that affects
the whole. For example, during the risk of the 1997 monetary
crisis in Indonesia. In this context, Education Tandelilin says
that market changes will affect the variability of an
investment's return. Systematic risk is also called market risk
or general risk.
To minimize the risk experienced by an insurance company is
usually to share the insured risk with business partners fellow insurance
companies. Because if an insurance company bears itself and the amount borne
is very large, it is estimated that when it has to pay an insurance claim it will
affect the ownership of funds owned by the company. So that on a number of
dependents that are considered usually insurance companies will invite their
business partners to bear together. Of course, the context of bearing this is not
only to bear the risk together but also to bear and share profits together.
In analyzing the risks that will be borne, each insurance company
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will have a different perspective. Insurance is also a business company that tries
to stay away from risk and strives to increase profits to the maximum,
especially providing maximum profits to shareholders. On that basis there are
insurance companies that think the risk can be insured and there are other
insurance companies that on the contrary do not accept.
There are two common reasons for which insurers find such risks
uninsurable, namely:
A. The level of risk is unpredictable. Where the risk cannot be
reasonably measured and analyzed how many dependents and when
it occurs and has a very large (high) chance of risk occurrence.
B. The level of risk is long-term and difficult and incomprehensible
when it will occur. Examples include war zones, protracted
conflicts, and others. Such wars or military conflicts are already
complex. Often, protracted wars occur due to the intervention of
foreign parties who feel they have an interest in the war. The
Afghan and Iraqi wars have given us strong evidence that the
conflicts there have occurred to this day because of the interference
of other countries such as America, Russia, and others.
6.5 CONDITIONS UNDER WHICH A RISK CAN BE INSURED:
According to Herman Darmawi there are 6 (six) risks that can be
insured must meet the following conditions (Irham Fahmi 2016: 346):
A. The potential loss is large enough but the probability is not high
enough to make the insurance company work as economically as
possible (economic feasibility). For example, you do not want to
lose a pen worth Rp. 2000.00 but you will not intend to insure this
risk because the loss is not large enough.
B. The probability of loss can be calculated.
The insurance premium rate is based on a forecast of the future.
This forecast is based on estimated probabilities. These probabilities
are generally based on past experience. This is the method used by
insurance companies to estimate probabilities. But this method is
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only useful if it can be assumed that the determinants of the future
will be the same as the determinants of the past. Otherwise, past
experience cannot be used as a guide to the future. If the probability
of the loss to be insured cannot be calculated, the risk cannot be
insured.
C. There are a large number of units exposed to the same risk (mass
and homogeneous).
The main requirement for insurability is bulk, meaning that there
must be a large number of units, for example in the case of car
insurance, there must be a certain number of units large number of
cars. In life insurance, there must be a large number of people. To
obtain an accurate estimate of the probability requires observing a
large number of events. Once the probability of loss is known, it
becomes the basis for a forecast, but this forecast only applies to a
large group. The insurance company is no more able to predict the
loss of a particular person than the person himself.
How big is the 'big group?" For insurance purposes, the number
of units depends on the insurer's willingness to assume the risk of
deviations from expectations.
For example, the probability of a house fire is 1/1000. An
insurance company may assume the risk for 1000 homes with the
expectation that there will be one claim for the year. If no fire
occurs, then there is a 100% deviation from the forecast. On the
other hand, if two houses burn down that year, then the claim to be
paid is twice as much as expected. This burden is too heavy for the
insurer. By increasing the number of insured houses to 10,000, the
expected loss increases to ten but the stability of experience
increases, meaning that the actual loss may range from five to
fifteen, but in percentage terms this deviation is smaller than in the
group of 1000 houses. Similarly, if this group is increased to
100,000 houses, the difference between actual and expected fires
increases in absolute numbers, but decreases in percentage terms.
Homogeneous here does not mean 100% the same, as no two
things or people are exactly the same. However, the units within a
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group must be similar enough to make an accurate prediction.
D. The loss incurred is fortuitous.
The risk assumed by the insurer must be incidental. Ideally, the
insured should have no control or influence over the risk the event to
be insured. In reality, this situation only applies to disasters such as
earthquakes and climate change. Both moral hazard and morale
hazard affect the probability of loss. The loss forecast is based on
probabilities estimated by observing past experience. Thus, the
observed events are mostly chance occurrences. The use of
estimated probabilities to forecast future losses is based on the
assumption that they are also chance events. If this is not the case,
then the forecast is not accurate.
E. Definite loss
Generally, insurance companies promise to pay for losses if they
occur during a certain time and in a certain place. For example, this
agreement may cover fire losses at a certain location. For this
contract to be valid, it must be known "when" and "where" the loss
occurred.
F. Not a catastrophe risk.
When an insurance company underwrites a group of risks, it
expects that the group as a whole will suffer a loss. However,
insurance theory dictates that only a fraction of the group will suffer
a loss at the same time. A relatively small contribution from each
member of the group will be enough to pay for all the losses. So the
contribution of the many is for the loss of the few. However, if most
or all of the insureds suffer a loss at the same time, the "relatively
small contribution" will not be sufficient. So a basic requirement for
insurability is that it must not be a catastrophe. There must be a loss
limit that the insurer is reasonably certain will not be exceeded. If
this limit cannot be accurately predicted, it is not possible to
determine the amount of the insurance premium or the amount of
surplus required.Catastrophe losses may occur in two ways:
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⮚
all or most of the groups face the same event with the
same cause of loss.
⮚
If the units in the group are interconnected in such a way,
a loss to one unit in a chain reaction can result in a loss to
the whole. For example, if an insurance company covers
the risk of fire damage for all buildings in a dense area,
this insurance company can suffer catastrophe losses
because if a fire occurs in one building, the fire can
spread throughout the area. That is why fire insurance
companies limit their total commitment within a city or
region, in order to avoid catastrophe risk.
As according to Soesino Djojosoedarso that from the point of view /
interests of insurance companies there are several requirements so that a risk
can be insured, namely (Irham Fahmi 2016: 346):
A. The number of insured objects must meet the requirements of both
quantity and quality, in order to calculate the amount of the
possibility of a balanced loss.
B. The loss incurred must be accidental and unintentional.
C. The loss, if it occurs, must be determinable and measurable.
D. Losses do not relate to matters where the situation is extremely
dangerous (catastrophic).
6.6 ROLE INSURANCE SWASTA AND GOVERNMENT IN RISK
MANAGEMENT PERSPECTIVE
The scope of risk handling by private and government insurers is different.
Usually privately owned insurance bears a greater risk. This condition occurs because
private insurance has less financial capability than the government. Because
according to Herman Darmawi (Irham Fahmi 2016: 347) that the government through
public or private forces, even government insurance companies prefer to carry out
more stable operations.
One of the government programs in the field of LPS (Deposit Insurance
Corporation) and also BLBI (Bank Indonesia Liquidity Assistance) assistance is a
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form of security so that the economic and social stability of the community is
maintained. Because if the economic and social stability of the community is not
stable, it will have a further influence on economic chaos and social and political
instability. And furthermore, the image of the government in the eyes of foreign
countries is not good, especially investors.
To better understand this issue, we can see in the table below the
difference in the scope of risk handling by private and government insurance
companies.
From the explanation above in the scope of risk handling carried out by
the government (government), we can see the example of the Century Bank case
and several other banks that received serious handling from the government.
This serious handling especially protects depositors. For the government, it is
very important to maintain the prestige of national banking in the eyes of the
international community. If the condition of national banking is not good
(problematic), there will be a decrease in trust from international donors such as
the World Bank, International Monetary Fund (IMF), Asean Development Bank
(ADB), and other aid agencies, including bilateral and multilateral aid from
countries. In a further context, business people or investors. Of course, they will
not have an interest in investing in a country if the national banking conditions
do not provide comfort.
6.7 THE DIFFERENCE BETWEEN RISK MANAGEMENT AND
INSURANCE :
Insurance companies and risk management have a strong relationship,
but in addition they also have their differences, which is certain that insurance
companies in carrying out their business activities apply the concept of risk
management. In the sense that insurance companies make risk management
science a form of how they get profit in carrying out company activities. For
more details, we can see in the table below.
6.8 CONDITIONS THAT ENABLE BUSINESS DEVELOPMENT
INSURANCE:
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According to Soeisno Djojosoedarso there are several conditions that
allow the development of the insurance business, these conditions include
(Irham Fahmi 2016: 351):
A. The economic system of the society is a free economic system.
From the explanation of the insurable risk requirements, it can
be seen that the insurance business will not be able to grow in a
condition where there is no element of risk. Insurance business can
actually also grow in countries where all means of production are
owned and controlled by the state (communist countries) and
decisions regarding the economy are only made by a few officials at
the center of government. But in such societies insurance is never
seen as an institution that has a significant role, as an economic tool
in its own right, which can be utilized to reduce risk. In such a
system, the government bears some of the risks faced by economic
actors. Thus the government can be seen as a giant insurance
company. On the other hand, in a free economic system, each
economic actor must face everything that might happen on his own,
so that everyone is able to minimize the risks.
will try to protect themselves against these risks. One way is through
insurance.
B. The society is very advanced and is an industrialized society.
Insurance business will not be able to develop in societies whose
economic conditions are still agrarian (agricultural society) or
countries whose industrial level is still low. In agrarian (agricultural)
societies, their dependence on money is not as great as in developed
or industrialized societies, where most of their needs can be
provided by themselves so that there are not so many trade
transactions. On the other hand, in developed and industrialized
societies, workers or almost everyone depends on the monetary
income from specialized jobs.
C. The laws and regulations are well organized, fairly applied and
widely known.
As one of the institutions, insurance companies will be able to grow
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and develop very well in conditions where the laws and regulations
are well organized, known by all parties and can be applied fairly.
Fairness in the application of laws and regulations is the main factor
for the success of insurance companies, because insurance activities
are carried out through binding contracts, so legal certainty becomes
very instrumental. In conditions of community life where political
influence often results in war or revolution, rampant dishonesty
resulting in injustice in the judiciary will result in the insurance
business not being able to develop properly, because of the
uncertainty of action, both predictable and not. This will predictably
result in the insurer and the insured not having confidence that the
things they have as stated in the contract will be carried out properly,
and as a result, the insurer will not be able to survive in the
insurance field.
THE ROLE OF INSURANCE AS A RISK TRANSFER
7.1 Definition Insurance:
Insurance is an institution that can be established on the basis of stabilizing
business conditions from various risks that may occur, with the hope that when the
risk is diverted to the insurance company, the company becomes more focused on
running a business. The guarantee provided by the insurance is the payment of
claims to customers.
The definition of insurance according to KUHD (Kitab Undang-Undang
Hukum Dagang) article 246 is, insurance or coverage is an agreement, in which an
insurer associates himself with the insured by receiving a premium, to compensate
him for a loss, damage or loss of expected profit, which he may suffer due to an
uncertain event.
Based on this definition, insurance contains 4 elements, namely:
1. The insured party (insured) who promises to pay premium money to the
insurer, at once or in installments.
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2. The insurer promises to pay a sum of money (compensation) to the insured
party, at once or in installments if something happens that contains an
element of uncertainty.
3. An event (accident) that is uncertain (not known in advance).
4. Interests may suffer losses due to uncertain events.
In more depth to provide a comparison of the definition of insurance, we can
look at the opinions below.
1. Definition of insurance by Prof. Mehr and Cammack
"Insurance is a social tool for reducing risk, by pooling a sufficient number
of units exposed to risk, so that losses are minimized their individual losses
are collectively foreseeable. Then the foreseeable losses are to be borne
equally by those who join".
2. Definition of insurance by Molengraatf
"Loss insurance is an agreement by which one party, the insurer associates
itself with the other, is responsible for compensating losses that can be
suffered by the insured due to the occurrence of an event that has been
determined and which is uncertain and accidental, with which the insured
promises to pay a premium.
From the various definitions above, we can understand that in the concept
of risk management in insurance companies there are two parties, namely:
a. Insurer, and
b. Insured
Where the insurer is an insurance company whose duty is to bear the losses that
arise, which of course is preceded by an agreement made, and the insured is a
customer who has been paying premium money to the insurer in installments and
discipline, where by submitting a claim made by the insurer is obliged to check or
assess how much damage arises or suffered by the customer concerned. For
example, a house is insured by its owner, then has an accident, then the owner of
the house as a customer of an insurance company submits a claim to the insurance
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company, and then the insurance officer will assess how much damage is caused.
On the basis of the assessment carried out, the insurance company will process and
replace the damage that occurred.
7.2 Types of Insurance
Insurance itself is known in various types or kinds and is grouped according to focus
and risk. It is this focus and risk that determines the size of uniformity in the risks borne
according to the type of policy. This will be used by insurance companies to anticipate
potential losses and set the premium rate offered according to each type of insurance.
The following are the types of insurance in Indonesia:
1. Life Insurance
This type of insurance is known to provide financial benefits to the
insured upon their death. The payment system for this type of life insurance also
varies.
There are insurance companies that provide payouts after death and others that
allow the insured to claim funds before their death. Life insurance can be
purchased for the benefit of oneself and on behalf of the insured alone or
purchased for the benefit of a third person. Life insurance is also known to be
purchased on the life of another person. As an illustration, suppose a husband
can purchase life insurance that will benefit him after the death of his wife.
Parents can also insure themselves against the death of the child.
2. Health Insurance
This type of insurance is also quite well known by the people of
Indonesia. Health insurance is an insurance product that handles the insured's
health problems due to an illness and covers the cost of the treatment process.
Generally, the causes of the insured's illness whose costs can be borne by the
insurance company are injury, disability, illness, and accidental death. Health
insurance is also known to be purchased for the benefit of the insured only or
for the benefit of a third person.
3. Vehicle Insurance
The most popular vehicle insurance in Indonesia is a type of car
insurance that focuses on covering injuries to others or damage to other people's
vehicles caused by the insured. This insurance can also be for
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to pay for loss or damage to the insured motor vehicle. Vehicle insurance is one
of the general insurance products. This type of insurance had become a boom
when the May 1998 riots occurred because the event made public interest in
ownership of protection for private vehicles increased dramatically.
4. Home and Property Insurance
As an asset that is considered quite valuable, usually homeowners will
protect themselves and their assets which can be in the form of a house or
personal property with home and property insurance. This insurance provides
protection against loss or damage that may occur to certain items belonging to
the insured person. This insurance also protects and provides relief if the house
or other insured property experiences a disaster such as a fire.
5. Education Insurance
This is the most popular and favorite insurance for policyholders.
Education insurance is the best alternative and solution to guarantee a better
life, especially for children's education assets. The premium fee that must be
paid by the insured to the insurance company varies according to the level of
education that the insured wants to get later. Understanding the importance of
using education insurance for children is now something that is of concern to
parents. The high cost of education and other conditions that worsen the
economy such as the weakening of our currency against the US dollar affect the
cost of children's education later. Realizing that this will clearly burden parents,
it is not uncommon for parents to now choose to have education insurance.
6. Business Insurance
This insurance is a protection service against damage, loss, or large losses
that may occur to one's business. This insurance provides compensation for
damage caused by fire, explosion, earthquakes, lightning, floods, hurricanes,
rain, collisions, and riots. Insurance companies usually offer a variety of benefits
from business insurance such as protection of employees as business assets,
investment and business protection, comprehensive life insurance for all
employees, to health insurance protection packages for employees.
7. General Insurance
General insurance is protection against the risk of loss or loss of benefits
and legal liability to third parties.
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General insurance coverage is short-term (usually around one year).
General insurance can be classified into several types, including:
a. Social Insurance
This type of insurance is mandatory for every person or resident with
the aim of everyone having old-age security. Premium payments are
made by force, one example is by deducting one's salary every month.
b. Voluntary Insurance
This insurance is carried out voluntarily. Voluntary insurance can be
further divided into 2 classifications, namely Government Insurance and
Commercial Insurance. Government insurance is insurance run by the
government, while commercial insurance is insurance intended to
provide protection to a person or family and company from risks that
may arise due to unexpected events.
7.3 Benefits of Insurance:
There are several benefits that can be received when a person or
institution enters insurance, namely:
1. Insurance is able to act as a risk neutralizer. The definition of risk
neutralization is when the risk occurs and the longer it tends to get bigger,
the insurance with its various formats tries to be strong so that the risk in a
company is not getting higher but can even be minimized until it can be
eliminated. But what needs to be remembered is that trying to eliminate risk
to the point of zero is very difficult, but with the insurance institution, it is
hoped that the risk can be at the smallest point. For some parties, there are
always strong efforts to completely eliminate risk by entering and applying
various formulas that are found or created.
2. Insurance as a compensation party. A person who enters and is registered as
an insurance customer is obliged to pay every month with the details and
costs of insurance claims specified in the agreement letter agreed upon by
both parties, namely the insurer and the insured. Insurance as a risk insurer
has a strict function that when the customer experiences risks such as fire
and the like in accordance with applicable needs, the obligation to
compensate for the agreed amount.
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3. Reducing mental and physical torment for the insured party caused by fear
and worry.
4. Generate optimum production levels, price levels, and price structures.
5. Improving the competitive position of small companies. In addition,
insurance companies in practice also play an important role in loss control
activities.
7.4 Transfer Risk
In general, there are 2 (two) forms of risk transfer carried out by
companies or individuals, namely:
1. Transferring the risk to an insurance company. In this context, the company
registers itself with an insurance company. This insurance company
registration can be done as a form such as:
a. Insurance on objects owned by the company, for example vehicles,
machinery, buildings, computers and others.
b. Life and health insurance, covering insurance carried out on every
employee who works in the company. So that when an employee has a
work accident or illness, the employee will get cost coverage. For
example, the cost of free medical treatment.
According to Hermawan Darmawi in the book Risk Management
Revised Edition by Irham Fahmi in 2016, if a company transfers risk to an
insurance company, then this company must pay a premium which can be
divided into two parts:
a. Low allowance, which is the insurer's estimate of the insured's expected
loss.
b. Loading which includes the cost of profit margin, and estimated
unexpected expenses. This loading can be as high as 30% - 40% of the
premium. If the company intends to bear the risk itself, it must consider
whether it will be cheaper, because it saves on premium payments.
2. Transferring risk to non-insurance companies. In this context, the company
will transfer a risk that it will experience to another company. This can be
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done such as:
a. The company will transfer some of its work to other parties, because if
done alone it is not expected to be maximized or completed on time.
b. The company moves some of its assets from money to objects such as
land or buildings with the prediction of having a profitable value in the
future.
c. Deposit a number of company valuables in a place that is considered
safe, such as a safety box in the bank.
d. Diversify assets. Diversification is placing or owning assets in different
places. For example, companies with financial ownership do not only
focus on purchasing or owning assets of only one type, such as buying
corporate bonds. Where there is an economic crisis will cause many
companies to be destroyed or shaken and this results in a fall in bond
prices in the market, as well as companies selling bonds having
problems paying bond interest so that the expected profit from bond
interest is not fulfilled.
7.5 Business sector risk insurance:
When someone enters or establishes an insurance company, they will face
several forms of risks that can occur, namely:
a. Problems when insurance claims occur and for the insurance company
must provide funds in accordance with what was agreed by both parties
in the agreement. Such as fire, death, accidents and so on.
b. If an insurance company opens an office in an area adjacent to a
volcano, tsunami disaster, and earthquake prone, then in the event of a
volcanic disaster and so on it will be a problem because the insurance
claim that must be paid is not one or several companies or individuals
alone but is overall.
c. The insurance company will try to avoid accepting clients (members)
who try to insure their products that have a high level of risk if
something unwanted happens. For example, the insurance company
avoids accepting insurance from traders in the area of book sellers, cloth
sellers, paper sellers, and others. Because in this type of shop the goods
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sold are very easy to catch fire and if it burns it can happen with a fire
the right time. This is different from what happens in meterial or
building stores, where the goods sold are not the type that can burn
quickly because most material stores contain cement, iron, wire, and
others.
d. Internally for insurance companies, the risks that occur involve acts of
dishonesty committed by their employees. Acts of dishonesty
committed by employees or what is commonly referred to as fraud
(intentional fraud) is a form of action that wants to take advantage
personally without thinking about the losses for the company as a
whole. For example, there is falsification of data on both purchases and
sales that deposit a certain amount of money every time.
e. Risks caused by dishonesty factors carried out by the company's internal
auditors. When an internal auditor makes an audit report in dishonest
conditions, it certainly has a specific purpose, such as he already knows
if the report made explains the conditions that must be dismissed from
his job. So that the person conducting the internal audit contacts the
party concerned and asks for a sum of money or even the problematic
party directly contacts / comes to the internal auditor to hand over a sum
of money so that the problem is covered or not reported.
f. The risk of management decisions concerns the decision to allocate
funds that are not appropriate and unable to provide results as expected.
So that the return obtained should be in accordance with the target, but
it turns out to be outside the target especially if it is far from the
expected target, while the funds used for asset allocation are mostly
funds used from the results of customers who deposit their insurance
obligations. So far, most insurance companies allocate their assets in
forms such as opening a supermarket business, property and real estate,
and so on. Where by expecting to allocate the selected assets to have the
following criteria:
•
Has a high turnover, or in other words, the goods sold are fast and
easy to sell.
•
Having a long-term profitable side, in the sense that profits will
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continue to be received not only in the short term but also in the long
term.
•
Away from systematic risk (market risk). Systematic risk is a risk
that cannot be diversified or in other words, a risk that affects
because it is comprehensive. An example is the risk during the 1997
monetary crisis in Indonesia. In this context, Eduardus Tandelilin
said that market changes will affect the variability of an investment's
return. Systematic risk is also called market risk or general risk.
To minimize the risk experienced by an insurance company is usually to share
the insured risk with business partners of fellow insurance companies. Because if an
insurance company covers itself and the amount covered is very large, it is estimated
that when it has to pay an insurance claim it will affect the leadership of the funds
owned by the company. So that at the amount of coverage that is considered high,
usually the insurance company will invite its business partners to bear together. Of
course the context of bearing this is not only equally bearing the risk but also equally
bearing and sharing profits.
In analyzing the risks that will be borne, each insurance company can have a
different perspective. An insurance company is also a business company that strives to
avoid risk and strives to increase profits to the maximum, especially providing
maximum profits to shareholders. On that basis there are insurance companies that
think the risk can be insured and there are other insurance companies that on the
contrary do not accept.
There are 2 (two) common reasons where insurance companies are of the
opinion that the risk is uninsurable, namely:
a. The level of risk is unpredictable. Where the risk cannot be reasonably
measured and analyzed how much coverage must be borne and when it
occurs and has a very large (high) chance of risk occurrence.
b. The level of risk is long-term and difficult and incomprehensible when it
will occur. For example, areas of protracted conflict war, etc. Such wars or
military conflicts are already complex. Often, protracted wars occur due to
the intervention of foreign parties who feel they have an interest in the
war. The Afghanistan and Iraq wars have given us strong evidence that the
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conflicts there have occurred to this day because of the interference of
other countries such as America, Russia, and others.
7.6 Conditions under which a Risk can be Insured
According to Herman Darmawi in the book Risk Management Revised Edition
by Irham Fahmi in 2016, there are 6 risks that can be insured by fulfilling the
following conditions:
a. The potential loss is large enough but the probability is not high, allowing
the insurance company to work as economically as possible (economic
feasibility).
b. The probability of loss can be calculated.
c. There are a large number of units exposed to the same risk (mass and
homegeny).
d. The loss incurred is fortuitous.
e. A specific (definite) loss.
f. Not catastrophe risk.
As according to Soeisno Djojosoedarso in the book Risk Management Revised
Edition by Irham Fahmi in 2016, states that from the point of view / interests of
insurance companies there are several requirements so that a risk can be insured,
namely:
a. The number of insured objects must meet the requirements of both quantity
and quality, in order to calculate the amount of the possibility of a balanced
loss.
b. The loss incurred must be accidental and unintentional.
c. The loss, if it occurs, must be determinable and measurable.
d. The increase does not pertain to matters where the situation is particularly
dangerous.
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7.7 The Role of Private and Government Insurance in a Risk Management
Perspective :
The scope of risk handling carried out by private and government insurance
is different. Usually, private insurance bears a smaller risk and government-
owned insurance bears a greater risk. This condition occurs because private
insurance has less financial capability than the government. Because according
to Herman Darmawi in the book Risk Management Revised Edition by Irham
Fahmi in 2016, that the government through its tax power, may also subsidize
public or private programs, even insurance companies, even government
insurance companies prefer to carry out more stable operations that are possible
if the risk assessment is an approximation of the ideal risk that can be borne.
One of the government programs in the field of LPS (Deposit Insurance
Agency) and also BLBI (Bank Indonesia Liquidity Assistance) assistance is a
form of security so that the economic and social stability of the community is
maintained. Because if the economic and social stability of the community is not
stable, it will have a further influence on economic chaos and social and political
instability, and furthermore the image of the government in the eyes of foreign
countries is not good, especially in the eyes of investors.
To better understand this issue we can look at the table below on the
differences in the scope of risk handling by private and government insurance
companies.
From the explanation above in the scope of risk handling carried out
by the government (government), we can see the example of the Century Bank
case and several other banks that received serious handling from the government.
Serious handling is especially to protect depositors. For the government, it is very
important to maintain the prestige of national banking in the eyes of the international
community. If the condition of national banking is not good (problematic), there will
be a decrease in trust from international donors such as the World Bank,
International Monetary Fund (IMF), Asean Development Bank (ADB), and other aid
agencies, including aid from bilateral and multilateral countries. In a further context,
business people and investors. Surely they will not have an interest in investing in a
country if the national banking conditions do not provide comfort.
7.8 Difference between Risk Management and Insurance
Insurance companies and risk management have a strong relationship, but
besides that they also have their differences, which is certain that insurance
companies in carrying out their business activities apply the concept of risk
management. In the sense that insurance companies carry out risk management
science as a form of how they get profit in carrying out company activities. For
more details, it can be seen in the table below.
7.9 Conditions that Enable Business Development Insurance
According to Soeisno Djojosoedarso in the book Risk Management Revised
Edition by Irham Fahmi in 2016, explaining there are several conditions that allow
the development of the insurance business, these conditions include:
a. The economic system of the society is a free economic system.
b. The society is highly developed and industrialized.
c. Laws and regulations are well-organized, well-implemented, and well-
defined.
fair and widely known to the public.
