HUMAN RESOURCES RISK
ARIZONA STATE UNIVERSITY
IEE 454 - RISK MANAGEMENT
WEEK 8
Definition of HR Risk:
In various studies we often hear about resources and their potential. In fact, not a few
organizations or companies always discuss resources, especially human resources. In general, the
problem originates from the internal organization or company due to the use of various resources
such as; Man or human resources (HR) employed, money / capital (capital) used in operations,
methods (systems) run, then materials (raw materials) used, machines or (machines /
infrastructure) used and information (information) used. So important is the position of human
resources in an organization or company that it places human resources as the main capital of the
organization or company. Perhaps most of us only know the benefits of owning organizational or
company resources, but rarely hear discussions about what the risks of these resources are,
especially HR risks.
In general, human resource (HR) risk can be defined as an activity or activity of human resources
that can cause or result in losses for an organization or company, for example; not achieving
organizational or company goals due to decreased activity from the performance of human
resources used, so that the organization or company suffers losses or target achievements
decrease from the previous year. The word risk (risk) and its understanding have been widely
stated by experts. As stated by Herman Darmawi that, Vaugan explains risk with three points of
view, namely; 1). Risk is the chance of loss, or Chance of loss which is usually used to indicate a
situation where there is an exposure to loss, 2). Risk is the possibility of loss, in other words, the
possibility that is understood by the probability or a different event for example between zero
and one. This understanding is close to what is meant by risk, 3). Risk Is uncertainty (Risk is
uncertainty), meaning that it is an uncertain situation and can cause losses. According to A. Abas
Salim that, risk is uncertainty or uncertainty, while Soekarto, that risk is uncertainty.
Based on some of the above opinions, it can be concluded that risk is uncertainty. This
understanding is closer to being caused by various risks that occur that can cause losses due to
events or circumstances that are difficult to ascertain or uncertain.
Given the enormous role of human resources in an organization or company, so that management
pays more special attention to human resources (HR) because, human resources are very
different from other resources. Human resources (HR) require management and attention that is
different from other resources.
Meanwhile, the definition of human resources can be seen from the micro and macro sides.
Macro Human resources (HR) are all humans or as residents or as citizens of a country within
certain territorial limits who have entered the labor force age, either who have or are working or
who have not obtained work or are still looking for work, in other words, the population who are
of productive age. And micro Human resources (HR) are humans or people who work or are
members of organizations called personnel, employees, employees, workers, labor and others.
Human resources (HR) are a very important aspect in an organization or company and human
resources are the most important resources in determining the growth and development of an
organization or company. Therefore, human resources (HR) employed in an organization or
company must have the ability and expertise in their fields, have qualified qualities so that they
can carry out activities properly and productively.
Some of the functions of human resources (HR) are as follows;
1.
As Labor
Human resources (HR) function as labor (Labor). Because human resources function as
labor, humans must be able to provide services through their abilities. In other words, human
labor is able to produce something useful for the progress of the organization or company.
2.
As a Leader
Human resources (HR) have a very important function and role for the progress of an
organization or company. Because of that, humans can be used as leaders. Especially if the
abilities possessed are very qualified and can advance the organization or company. So,
every human being has the potential to become a leader, but not all humans have a
leadership spirit, it is because the quality as a human resource is not owned.
3.
As Experts Labor
As human resources (HR), it also has a function as an expert in an organization or company.
Human abilities in several fields, especially technology and marketing, are very important to
support and build the company. If the human resources of an organization or company are
experts in various fields, it is certain that the company will progress and develop rapidly.
4.
Serves as Evaluation
Competent human resources (HR) are a resource for evaluating an organization or company.
Evaluation needs to be done to determine the level of quality and performance, and those
with poor quality or performance will be guided through empowerment by providing
education or training.
5.
As a Relationship Builder
As an organizational or company resource, the position of human resources is very
calculated, this is due to its ability to build relationships and negotiate to establish
cooperation with various parties. This is one of the most important functions of human
resources. Therefore, human resources (HR) become the driving force of the wheels of the
organization or company, so that to advance the organization or company, all the potential of
human resources (HR) must be maximized because the better the performance of human
resources, the better the achievement of organizational or company goals.
6.
As a Business Partner
In organizations or companies, human resources (HR) also function as business partners
because of their position outside the organization as business people or entrepreneurs. Not
even a few of them are entrepreneurs who involve themselves in the production process.
7.
As Producer and Consumer
Human resources (HR), apart from being an organizational tool, also function as producers
and consumers. Its position as a producer makes it a partner of an organization or company
that can offer its products to the company. Meanwhile, as consumers because human
resources (HR) also need to meet their needs, so they become a market for organizations or
companies.
From some of the functions of human resources (HR) referred to, it can be concluded that, every
organization or company will not be able to progress, grow and develop without the role of its
human resources. So it is important for every organization or company to maintain and maintain
its quality human resources and the need for the management of the organization or company to
continue to provide guidance to its human resources.
Risks to Human Resources (HR):
Every activity will always be faced with a level of risk, whether small-scale or large-scale. Risk
is part of human activity, therefore it is not an exaggeration when humans live inseparable from
risk.
Risk is something that cannot be avoided, and whatever our activities will always face risks.
However, risks can be minimized so that the losses suffered by each individual, organization or
company are not too large. In various writings related to risk management, it is mentioned that it
is necessary to know the things related to various company risks.
Among the things referred to are, "Types of Risk Variety" which are generally divided into;
1.
Risk by nature, as for risk by nature consists of:
a.
Pure Risk; a risk that occurs due to disasters such as fire, natural disasters and riots.
b.
Speculative Risk, namely; risks that are deliberately caused such as; accounts payable,
futures trading and stock exchange investment.
c.
Fundamental Risks are risks that cannot be transferred to other parties because of their
causes such as natural disasters such as floods, landslides or hurricanes.
d.
Special Risks are risks whose source is a single accident such as a vehicle collision or
plane crash.
e.
Dynamic Risk, namely; a risk that arises due to the development of human civilization
such as; advances in science and technology.
f.
Static risk; a risk that is static in nature, for example due to the influence of age, old age
and death.
2.
Transferable risks. This risk can be divided into two:
a.
Risk that can be transferred to other parties, namely, an object of risk whose coverage
can be transferred to other parties or companies that accept the transfer of risk with the
obligation to pay a calculated amount of premium. The company that can accept the
transfer of risk from other companies is an insurance company.
b.
Non-transferable risk i.e., a certain type of risk that cannot be transferred and remain the
responsibility of the company itself.
3.
Risks based on the source of occurrence are divided into two types, namely;
a.
Internal Risk is a risk whose source of occurrence comes from within the company
itself, such as work accidents, broken machines, or due to mismanagement.
b.
External Risk, namely; a risk whose source of occurrence comes from outside the
company such as; theft, competition, price fluctuations or caused by government policy.
In addition to the types of risks mentioned above, there are also general types of risks faced by
companies according to their functional areas. The functional areas include finance, marketing,
operations and human resources. This means that these functional areas will face various kinds
of risks, such as the risk of the financial section, namely; Risk of rising and falling interest rates
due to economic factors or credit risk or slowing payments due to disruption of the transaction
system.
We may ask why it is necessary to assess human resource risk. Please note that, risk in human
resources (HR) is very important for organizations or companies. This is because, human
resources drive the wheels of the economy and business (organization or company) including the
utilization of all existing resources including the risks incurred.
Based on several cases that we commonly encounter, there are at least 5 (five) main risks in the
aspect of human resources (HR) related to organizational or corporate strategic planning,
namely;
1.
Risk Level of Top Managers
At the top level there are several risks that need attention, especially in the executive group,
namely;
a.
Executives have a low sense of leadership, slow thinking, and lack of focus at work.
b.
Hard to control executives, difficult to control, unwilling to accept suggestions and
opinions.
c.
Toxic executive, bad attitude and behavior or bad personality.
d.
Weak executive finance manager.
e.
Top leadership positions that are unable to make decisions
2.
Risks to Employees
Organizations or companies must create good working conditions. The goal is that
employees, including management patterns, can be more open about rewards for all workers
or employees. It is necessary to pay attention to the culture and culture of the organization in
order to assess cooperation and excellence. Likewise, the condition of facilities and
infrastructure for workers or employees. Continue to provide training to develop a more
productive workforce. Including the process and mechanism of recruiting employees or
employees who are not good which will have an impact on the risk of employees in the
future.
3.
Risks to Company Relations
Organizations or companies must be able to assess the possibility of refusal by employees to
do work such as strikes and other possibilities caused by anarchist actions. Organizations or
companies must be able to pay attention to employees through coaching and empowerment.
4.
Risks Due to Stress Levels and Poor Health
In organizations and companies, tension problems always arise, even other bad habits can
also come together and it is definitely not good. The habit of skipping work is also an
indicator of employee disappointment. In these conditions, organizations or companies need
to build good communication with employees.
5.
Risk of Lack of Ethics
The decline in the performance of an organization or company is not always caused by some
of the previous risks, but can be caused by the failure of management to control the
company, so that the organization or company is difficult to survive, let alone grow and
develop.
It will certainly be a concern for organizations or companies regarding matters related to HR
risks. So that HR risks can be minimized through anticipatory steps taken by the Top Leader
of the organization or company.
HR Risk Prevention Strategy:
Resources are the most important element for an organization or company, especially human
resources. Every organization will certainly not be separated from the conception of human
resources (HR) because, human resources are the main cog of the organization or company.
Human resources (HR) for organizations are the most important asset or element and greatly
influence the successful achievement of organizational goals.
The development of saman assesses and views human resources (HR) no longer just as
resources, but as capital or assets for organizations or companies. So important is the position of
human resources in an organization or company that a new term emerged, namely Human
Capital, which is equivalent to Human Resources introduced long before.
Managing human resources is not easy, this is because human resources have their own
specificities. Human resources are closely related to psychological behavior, so their
management and utilization are also different from other resource elements.
According to C.G. Jung, that human attention is directed in two directions, namely out of himself
called extrovert, and into himself called introvert.
C.G. Jung also stated that human types can also be classified into 2 (two) major groups, namely:
1.
The extrovert-type group are people who have the following traits: open-hearted, smooth in
socializing, friendly, jovial, their relationship with the environment is very large. They It is
easy to influence and is also easily influenced by its environment.
2.
The introverted type is people who are less sociable, quiet, difficult to understand, like to be
alone, and are often afraid of other people.
While Kretschmer, suggests a close relationship between body type and nature and character
that, humans are divided into 2 (two) groups based on the type or shape of their body, namely;
1.
Human groups with athletic and asthetic types or traits, namely; schizothim, with traits or
characteristics such as: difficult to get along, his attitude remains as usual, difficult to adjust
to situations especially new environments, arrogant appearance, egotistical desire for power,
sometimes optimistic, sometimes pessimistic, and overly considerate.
2.
The human type with a picnic body shape is; cyclithim. In this type of human group, people
are sociable, like humor, their stemming is easy to change, good at adjusting, although less
loyal, and inconsistent but forgiving people.
There are various theories that discuss human personality types, however, it can be concluded
that the personality types of human resources (HR) can be classified into 4 (four), namely;
1.
Constructive Type
From a young age, this type of personality model generally adjusts well to changes and
patterns of life. From a young age, their behavior is positive and constructive, and they are
almost never Never been in trouble, in social relationships. This type of person has the
potential to be developed and empowered because of their ability to understand the tasks
they are given.
2.
Routine Type
For this type of person, the level of intellectual ability and imagination is still below the
constructive type. Lack of initiative, Tends to be giddy if not given clear instructions and
directions from superiors, but if directed properly he can work loyally and wholeheartedly.
This type of HR can usually work effectively if given clear direction. Very potential to be
developed and empowered, just give them time to complete their tasks and responsibilities.
3.
Impulsive Type
Humans who behave impulsively, namely; an attitude when someone takes an action
without thinking about the consequences of what is done. This condition is generally shown
by children, because they do not yet understand how to convey emotions or reduce the urges
that arise. In this type, management needs to take a personal approach and provide complete
directions and instructions along with targets. Attention and role models need to be given in
order to work well.
4.
Subversive Type
This type of person is difficult to control because they do not have strong principles, and
tend to think of personal gain, can justify any means to achieve their desires or are easily
provoked. This type of person should be given tasks with an emphasis on the following on
the goals to be achieved. Promise rewards and punishments where appropriate.
Based on the type of human resources (HR), it allows the management of organizations and
companies to make new breakthroughs in every activity, starting from employee recruitment to
handling human resources in organizations or companies. One of the breakthroughs that needs to
be made is the management of human resource management (HRM).
Eliminating HR Risks Through Human Capital Management:
In essence, human resource management is an implementation or practice of management
functions in general into the form of human resource management activities in an organization or
company, namely; employees or employees. Human resource management is a series of human
resource management activities that focus on practices and policies, as well as management
functions to achieve organizational goals.
The indicators of human resource management according to Ambar Teguh Sulistiyani and
Rosidah (2009) are planning, organizing, directing and supervising. Human resources are an
important component or a potential that contains a role to realize certain goals. Meanwhile, Bukit
et al that, good human resource management is to produce quality and quality human resources.
According to Matutina, (2001) that, the quality of human resources (HR) refers to three
dimensions of quality, namely;
1.
Knowledge, namely; the ability possessed by employees who are more oriented towards
intelligence and thinking power and mastery of the broad knowledge possessed by
employees.
2.
Skills, namely; the ability and mastery of technical operations in certain fields owned by
employees.
3.
Abilities, namely; abilities formed from a number of competencies possessed by an
employee which include loyalty, discipline, cooperation and responsibility.
Referring to the importance of human resources, organizations or companies need competent
human resources in their fields and there is no organization or company that does not need HR
management (Human Resource). Human resource management (HRM) will be responsible for
taking care of all the needs of the organization or company concerned including Human
Resource management (HRM).
According to Flippo (1976) that, Human Resource Management (HRM) is "Personnel
management is the planning organizing, directing, and controlling of the procurement,
development, compensation, integration, and maintenance of the people for the purpose of
contributing to organizational, individual and social goals".
In free translation it can be interpreted that, personnel management personnel management is
planning organizing, directing, and controlling the procurement, development, compensation,
integration, and maintenance of people for the purpose of contributing on organizational,
individual and social goals. Flippo in this case equates the definition of human resource
management with personnel management.
So human resource management is very important for an organization or company, especially in
managing, managing, and managing and using human resources so that they can function
effectively, productively and efficiently in order to achieve organizational or company goals.
Human resource management (HRM) is tasked with managing humans effectively in order to
obtain a mutually beneficial human resource unit. Human resource management (HRM) is part
of general management that focuses on human resources. Therefore, every leader or manager is
responsible for human resources and pays attention to the things that come with it such as;
appointment of new employees, retaining old employees, employee development, maintaining
employee obedience and order, and increasing the ability of the organization or company.
There are 7 (seven) main benefits of human resource management, namely;
1.
As a Recruitment and Training Tool.
The main benefits of human resource management (HRM) are; it can provide more qualified
new employees and can empower old employees, including, among others, compiling job
descriptions that are more suitable for their job positions.
2.
As a Performance-Based Management System
A further benefit of human resource management is that it is responsible for improving
employee performance management systems with the aim of making employees feel
motivated and appreciated for their achievements and being an efficient Performance
Management System in identifying and rewarding employee performance.
3.
Building Culture and Values
Another most important benefit of human resource management (HRM) in an organization
or company is that it can produce a healthy and comfortable work area that can help an
employee. Therefore, producing a good work area is the primary responsibility of the human
resources department to ensure maximum productivity.
4.
As Conflict Management
Another benefit of human resource management in the field of human resource management
(HR) is; as a manager of conflicts that occur between employees or superiors, or with
organizational or corporate networks. The field of human resource management must be
able to resolve conflicts that occur with good methods so that conflicts do not expand and
can be resolved.
5.
Employee Planner
Another benefit of human resource management (HRM) is as a supervisor and manager of
employee turnover. The goal is to find out the effects that can be caused related to the use of
employees, because if there is an employee turnover, the employee turnover will be reduced
mistakes and having to replace new employees will incur greater costs.
6.
As a Wage Function
Human resource management also functions as planning, calculating, paying, and
complaining related to wages. The human resource management field is obliged to provide
all employee rights in accordance with the provisions agreed upon in the contract or work
agreement, including overtime pay, deductions, allowances, and other incentives if any.
7.
As a Safety Tool
Another function that is considered very important is safety at work. The field of HR
management is obliged to maintain the safety and health of employees. Therefore, the design
of human resource management for employees must pay attention to risks, motivation
programs, conflict strategies, and employee safety, whether inside or outside the
organization or company.
By knowing these seven benefits, the objectives of human resource management (HRM) are as
follows;
1.
To develop and optimize work systems.
2.
To develop and implement stakeholder commitment within the organization or company.
3.
To ensure equal opportunity for all employees
4.
To ensure employee rights are in accordance with procedures.
5.
To create a better, more productive, effective and efficient working climate,
By knowing the functions and objectives of human resource management and accompanied by
careful implementation, the organization or company will benefit from the implementation of
HR management, especially handling risks, including employees or employees, both directly and
indirectly. Human resource management is indeed crucial, because it directly manages the living
elements of a company or business. But without human resource management, the organization
or company will spend a lot of budget to find and utilize the potential of human resources
needed.
9
PRINCIPLES OF RISK MEASUREMENT
Definition of Risk Measurement:
According to Suswinarno (2012) Risk measurement can be done by estimating how much the
level of loss (damage) and the probability of an event occurring is very subjective and more
based on reason and experience. According to Rustam (2017) Risk measurement is a periodic
evaluation that must be carried out by the company on the suitability of assumptions, data
sources and procedures used to measure risk and improvements to the risk measurement system
in the event of material changes in business activities, products, transactions and risk factors. To
estimate risk, companies can use various approaches, both qualitative and quantitative, adjusted
to business objectives, business complexity and company capabilities.
According to Sriyono (2019) risk measurement is an attempt to determine the size or size of the
risk that will occur. This is done to see the high and low risks that will be faced by the company,
then it can see the impact of risks on performance.
The company can also prioritize risks, which risks are the most relevant. Risk measurement is an
advanced stage after risk identification. Risk identification is basically a systematic and
continuous analysis activity to find or identify the possibilities of potential losses faced or
threatened by the company. This is done to determine the relative importance of the risk, to
obtain information that will help determine the appropriate combination of risk management
tools to handle it.
Principles of Risk Measurement:
1.
Transparency
This principle requires that all potential risks involved in an activity, especially a
transaction, be openly disclosed. Hidden risks will be the biggest source of problems and, by
definition, cannot be managed properly.
2.
Accurate Measurement
This principle represents the science side of the Risk Management concept, and requires
continuous investment in the various techniques and tools to be used as a condition of a
robust Risk Management process.
3.
Timely Quality Information
This principle will determine the accuracy of measurements and the quality of decisions
taken. Conversely, not fulfilling this principle can lead management to a fatal risk decision.
4.
Diversification
A good Risk Management System places the concept of diversification as something
important to look at. It demands a constant and consistent monitoring pattern. The
assumption is that concentrations (Risks) can arise at any time along with various changes
that occur in the world.
5.
Independence
Based on the principle of independence, the existence of an independent Risk Management
group is increasingly considered a necessity. This principle does not just talk about the
authority and level of responsibility of the group.
6.
Disciplined Decision Pattern
The science portion of the Risk Management concept has indeed contributed a lot to Risk
Management's ability to measure risk, but the quality of decisions still depends on how
management decides how best to use certain tools/techniques and understand the limitations
of these tools/techniques.
7.
Policy
This principle requires that the objectives and strategies of a company's Risk Management
must be formulated in a clear Policy, Manual & Procedure.
The principles mentioned above will determine the direction in developing a framework, a
reliable Risk Management model. Furthermore, these principles will also determine the success
of the implementation of the Risk Management model in an organization Company. Without a
deep understanding and consistency in using these principles, the development and
implementation of a Risk Management model will not provide the added value that should be
obtained.
Dimensions measured:
Once the various types of potential losses have been classified, then for the purposes of
determining how to mitigate them, these exposures must be measured. Where the measurement
has two benefits, namely:
1.
To be able to determine the relative importance of a risk faced.
2.
To obtain information that is indispensable to the Risk Manager in an effort to determine the
most acceptable / best combination of ways in the use of risk management tools.
In the measurement of risk, the dimensions measured are:
1.
The frequency of loss, meaning the number of times a loss occurs during a certain period. So
to find out whether a loss occurs frequently or not.
2.
The severity or severity of these losses. This means to find out how much influence a loss
has on the condition of the company, especially its financial condition.
From the measurement results that cover these two dimensions, at least it will be known:
1.
The average value of losses during a budget period.
2.
Variation in loss value from one budget period to another (increase or decrease in loss value
over time).
3.
The overall impact of these losses, especially losses that are borne by themselves (retained),
so not just the rupiah value.
Some things that need attention in relation to these measurement dimensions include:
1.
People generally view that the severity of a potential harm is more important than its
frequency.
2.
In determining the severity of a potential loss a Risk Manager must carefully consider all
types of losses that could occur, especially in relation to their effect on the company's
financial situation.
3.
In measuring losses, the Risk Manager must also consider other persons, assets or exposures
that are not exposed to the event.
4.
Sometimes the ultimate consequences of an event on a company's financial condition are
more severe than anticipated, partly due to unrecognized or unaccounted for indirect losses.
5.
In estimating the severity of a loss, it is also important to consider the duration of the loss, in
addition to its dollar value. This is related to:
a.
The time value of money, which must be calculated based on the prevailing interest rate,
b.
The ability of the company to distribute the costs (cash outlay) required for loss
prevention.
Example: A loss of Rp. 10,000,000, - every year, which occurs for 10 years is
considered lighter or less serious than a loss that only occurs once during 10 years, but
with a loss of Rp. 100,000,000, -. This is because in the first event: the interest expense
is lighter, and the company can easily include the loss in the cost component, while the
loss in the second event gives a high interest expense to the company so that it is
considered serious or severe.
Risk Measurement Techniques:
Some of the techniques that can be used to measure Risk are as follows:
1.
Risk Measurement with probability distribution
Used as a qualitative description of probability or frequency. The probability of a specific
event or outcome, measured by the ratio of the specific event or outcome to the number of
possible events or outcomes. Probability is symbolized by the numbers 0 and 1, with 0
signifying an unlikely event or outcome and 1 signifying a definite event or outcome. The
concept of probability is the concept of "sample space" (scope of events) and "event" (an
occurrence or event). Sample Space (Set S) is a set of certain observed events. For example,
the number of car accidents in a certain area during a certain period. A Set S can consist of
several segment (sub set) or event (Set E). For example, the number of car accidents above
consists of private car & public passenger car segments. There are 5 probability categories
as follows: a) Very rare; b) rare; c) possible; d) likely; and e) almost certain.
To carefully calculate the probability of a car accident, each Set E needs to be weighted. The
weighting is usually based on empirical evidence from past experience. For example, if a
private car is given a weight of 2, while a public passenger car is given a weight of 1, then
the probability of a car accident can be calculated by the formula:
a.
when weightless: P(E) = E/S
b.
when with weight:
Description:
P (E) = the probability of the event occurring. E = sub set or event
S = sample space or set
W = weight of each event
Example:
According to Kupang Resort Police records based on data from BPS NTT Province, the
number of car accidents in the Kupang City area during 2021 was 218. Of these, 110
happened to private cars and 108 to public transportation.
For private cars are given a weight of 2, while for public passenger cars are given a weight
of 1. then what is the probability value of a car accident.
Requested
What is the probability of an Accident? Solution:
a.
when unweighted: P(E) = 110/218 = 0.504 = 50.4%
b.
when with weight: P(E)
2.
Notional Risk is measured based on the value of the exposure (the object that is vulnerable
to risk). An example of measuring credit risk with the notional method. If the company lends
money to other parties worth Rp 2 billion, the amount of credit risk based on the notional
approach is Rp 2 billion.
3.
Volatility Risk is measured by how much the value of the exposure fluctuates. A common
measure is standard deviation. The larger the standard deviation of an exposure the more the
value of the exposure fluctuates, which means the riskier the exposure or asset is.
4.
Risk frequency and significance matrix
A fairly simple measurement technique (not involving too much complex quantification) is
to categorize risks based on two dimensions: frequency and significance. There are 2 things
in the process, namely:
a.
Develop risk standards
b.
Apply the standard to the identified risks.
5.
Scenario analysis
The ability of the manager or company to predict what will happen, and how much the loss
will be. Example: measurement techniques differ with the level of sophistication (level of
quantification), in the sense that different types of risk are also different techniques used.
Types of Risk Measurement:
1.
Loss Severity Measurement
The measurement of potential losses and the dimension of severity is to determine the
amount of loss value, which is then associated with its effect on the condition of the
company, especially its financial condition. In measuring the severity of potential losses,
there are three things that need to be considered, namely:
a.
The maximum possible loss from each behavior, i.e. the worst possible loss from a
behavior,
b.
The maximum loss probability of each behavior, which is the worst possible outcome, is
lower than the maximum loss probability,
c.
The aggregate maximum annual loss, which is the largest total loss that can be incurred
by a company during a certain period (usually one year).
Based on the dimension of severity, there are four categories of potential losses, namely:
a.
Normal loss expectancy, i.e., losses that can be expected to be managed by the company
itself or by the public (insurance company),
b.
Probable maximum loss, which is the loss that can occur if the safety device against the
peril cannot function,
c.
Maximum foreseeable loss, i.e. losses that cannot be overcome individually (cannot be
handled alone); so the handling must be submitted to the public (insurance company),
d.
Maximum possible loss, i.e. losses that cannot be secured, either individually or in
general (by the insurance company).
In determining the severity of losses, the Risk Manager must be careful to include all losses
that may occur as a result of a particular event and how the final impact on the financial
condition of his company. Because it often happens that what is seen is an insignificant loss
(direct loss), while the more important loss is often difficult to identify (indirect loss).
2.
Loss Frequency Measurement
A measure of loss frequency is the probability that a single unit will suffer one type of loss
caused by a single behavior. Loss frequency measurement is done to find out how many
times a type of peril can hit a type of object that can be affected by the peril during a certain
period, generally one year.
To find out how many times a type of peril (an event whose occurrence causes LOSS or a
direct cause of loss) can befall a type of object that can be exposed to the peril during a
certain period of time, which is generally one year. Then what needs to be considered are:
a.
Some types of losses that can befall an object
b.
Some types of objects that may be subject to a type of loss
Based on the frequency dimension, there are four categories of losses:
a.
Almost nil losses, i.e. risks that in the opinion of the Risk Manager will not occur or the
probability of occurrence is very small or almost impossible to occur (probability of
occurrence is close to zero),
b.
Losses that are likely to occur (slight), i.e. risks that will not occur in the near future and
in the future the possibility is small,
c.
Moderate losses, which are losses that may occur in the near future.
d.
Definite losses, which are losses that usually occur regularly, both in the near future and
in the future, so they are losses that are almost certain to occur.
In relation to measuring losses from the frequency dimension, the Risk Manager must also pay
attention:
a.
Some types of losses that can befall an object,
b.
Several types of objects that can be exposed to a type of loss.
c.
Because both of these will greatly affect the probability of potential loss.
RISK MITIGATION
Understanding Risk
Risk can be said to be an absolute thing in every decision. The definition of risk itself has various
meanings and connotations according to the discipline studied. So that in terminology risk can be
interpreted as an event or event from decision making that can or cannot be anticipated, and most
risks have a negative impact on a person, several people or organizational institutions against
predetermined goals. Risk always coexists with decisions in life with, instead of risk having an
unfavorable connotation so that it is avoided, in fact there are still many decisions that produce
good things such as the increasing number of innovations in companies. According to Vaughan
(1978) there are several definitions of risk, namely as follows:
1.
Risk is the chance of loss. Chance of loss relates to an exposure to the possibility of loss. In
statistics, chance is used to show the level of probability that a loss will occur.
arise in a given situation. In this case, the chance of loss is 100%, meaning the loss is certain
so there is no risk.
2.
Risk is the possibility of loss. The term possibility means that the probability of an event is
between zero and one. However, this definition is not suitable for quantitative analysis.
3.
Risk is uncertainty. Uncertainty is both objective and subjective. What is subjective is a
person's assessment of the risk situation based on the knowledge and attitude of the person
concerned. While objective uncertainty will be explained in the following two definitions of
risk.
4.
Risk is the dispersion of actual from expected results. Statisticians describe risk as the
degree of deviation of a value around a central position or around an average point.
5.
Risk is the probability of any outcome different from the one expected. The definition of risk
this time is not the probability of a single event, but the probability of several outcomes that
differ from the expected one.
From some of the definitions above, risk is seen as a consequence that inevitably must be faced
by individuals in every decision making. In fact, the existence of risk cannot be predicted clearly,
so it requires a management strategy that is appropriate for the individual effective to minimize
the occurrence of excessive losses for organizations, individuals and business entities.
Types of Risk:
In a business, risk is something that cannot be avoided, even risk has become a natural thing
because there will be many decisions made in a business. Therefore, understanding the type of
risk is important in a business in order to be better prepared to run the business in the future.
According to Hanafi (2006) several types of risk are generally described as follows:
1.
Pure risk
Pure risk is the uncertainty of the occurrence of a loss or it can be said that there is only a
chance of loss and not a chance of profit. Pure risk is a risk that if it occurs can provide a
loss and if it does not occur it does not cause a loss, but also does not cause a profit. So that
this risk results in only two kinds, namely loss or break even. So it can be concluded that
pure risk is something that can result in harm or nothing happening and may not be
profitable. An example of pure risk is when there is a fire, if a company experiences a fire
then the company will suffer a loss and not make a profit, unless the fire that occurs is done
intentionally for certain purposes. Other examples of pure risk include theft, flooding,
accidents and others. One way to avoid pure risk is with insurance. Thus the losses incurred
can be minimized to minimize risk. Therefore, pure risk is known as insurable risk.
2.
Speculative risk
Speculative risk is also commonly known as business risk, speculative risk is a risk
associated with the occurrence of two possibilities, namely the opportunity to experience
financial losses or gain profits. Speculative risk is a risk where we expect losses as well as
profits, thus in speculative risk there are three kinds of consequences, namely profit, loss or
break even. Speculative risk is also a situation faced by a company with one side that can
provide benefits but on the other hand can also cause a loss. An example of speculative risk
is if we buy shares of a company for these shares if the share price increases then we will get
a profit and vice versa if the share price decreases then we will experience a loss. Losses
arising from speculative risk can be in the form of individual losses, although the losses
received may benefit other parties, for example, such as a company experiencing losses due
to decreased sales, there will be a possibility of other companies benefiting from this
situation, the public does not suffer losses due to speculative risk. A businessman is
someone who will most often take risks with all the consequences. One of the reasons a
businessman dares to take risks is because of the desire to take risks. They also have the
principle that opportunities do not come a second time, so of course the decisions taken have
been made with very careful consideration and try as much as possible to minimize the risks
that might occur.
Source of Risk:
The source of risk itself may occur due to many things and must be known and identified as a
basis for handling risk. According to Godfrey (1996), there are several sources of risk that must
be considered, namely:
1.
Political, this risk comes from political policies. For example: public revenue policy,
government, regulations, ideological changes, etc.
2.
Environmental, this risk comes from the surrounding environment. Examples: pollution,
public opinion, internal or company policies, environmental impacts, and others.
3.
Planning, this risk comes from a business planning process. Examples: licensing
requirements, social impacts, land use and economics, public opinion.
4.
Marketing, this risk stems from the marketing process. Examples: competition, demand,
customer satisfaction, trends, etc.
5.
Economic, this risk comes from economic policy. Examples: financial policy, taxation,
inflation, interest rates, currency exchange rates.
6.
Financial, this risk comes from those related to the company's finances.
For example: Bankruptcy, insurance, profit and others.
7.
Natural, risks that stem from natural factors. Examples: soil conditions, earthquakes,
weather, archaeological site findings.
8.
Project, this risk comes from the activities of a project. Examples: procurement strategy,
performance requirements, leadership, work standards, work plans, etc.
9.
Technic, risks that stem from technical matters. Such as design completeness, operational
efficiency, reliability.
10.
Human, a risk whose source is the individual. Examples include: procedural errors, culture,
fatigue, negligence, incompetence, and others.
11.
Criminal, this risk exists because of the potential for criminal acts. Examples: vandalism,
fraud, corruption or theft.
12.
Safety, risks related to occupational safety. For example, hazardous substances, collapse,
collision, flooding, fire and explosion.
Risk Management:
In running a business, there will certainly be many kinds of challenges and risks that will be
faced. Especially if the business being run has a large scale based on the company. Then the
company leader must be able to organize and manage every resource owned properly in order to
achieve the planned goals. In order to manage a business well, companies need to implement
what is called risk management.
This risk management is an effort made to protect the company or organization from possible
dangers that can threaten and occur in the future. In this case, protection is carried out for
employees, reputation, property, and various important things owned by the company.
Risk management is a structured approach or methodology in managing uncertainty related to
threats; a series of human activities including risk assessment, strategy development to manage it
and risk mitigation using empowerment/resource management (Ardi Putra, 2021). The purpose
of risk management itself is to ensure that the organization or company can measure, understand,
and monitor all risks that occur and ensure that all policies within the company can overcome the
various risks that occur. The general purpose of risk management is as a basis for predicting
threats or things that can cause losses with careful calculation. The specific objectives of risk
management according to Ahmad (2021) are as follows:
1.
Provide risk information to parties
regulator.
2.
Minimize losses from various risks
uncontrolled.
3.
To keep the company alive with continuous development.
4.
Cost efficient and effective risk management.
5.
Provide a sense of security.
6.
So that the company's income is stable and able to provide satisfaction for owners and other
parties.
Failure to manage risk can occur due to ignorance of which risks are right and which are not. In
addition, it could also be due to fraud or poor governance. The point is that what can cause
failure in the implementation of risk management is not just one source, it could be due to a
combination of problems that have not been resolved before. This is what makes us need to learn
the definition of risk management complete to the following steps.
Therefore, in order to overcome the risks that may occur, a process called risk management is
needed. Risk management is a management activity carried out at the executive leadership level,
namely the discovery and systematic analysis of losses that the company may face as a result of
risks and determining the most appropriate method to overcome losses related to the level of
company profitability. Not only that, risk management can also carry out planning in prevention
efforts in anticipation of various problems. If this risk management can be implemented
properly, then various possible problems or obstacles can be minimized and overcome more
effectively.
Risk Management Steps:
In risk management itself there are several steps in the process, these must also be considered so
that risk management gets effective results. According to Fajri (2021) the process that must be
considered in an effort to carry out risk management in the company is as follows:
1.
Establishment of Context
The process of determining the context in risk management is related to the objectives,
strategies, scope related to managing company risk. The process of determining this context
is also related to the problems managed by the company such as external, internal corporate
environment, and risk criteria.
2.
Risk Assessment
The second process is risk assessment which aims to identify risks that can affect the
achievement of the organization or company. The way this risk is identified is by listing and
measuring the level of risk. After identification, the results of measuring the risk status will
show a picture, map, and level. At this stage, it is carried out to compare the results of risk
analysis and predetermined criteria as a basis for implementing handling.
3.
Risk Management
In this process, risk planning is carried out to obtain effective handling and solutions. The
purpose of handling this risk is to minimize the impact of risk on third parties who may
receive risk. In addition to the three processes described above, there are other supporting
processes, namely consultation, communication, monitoring, and review. The purpose of
communication and consultation is to support activities during risk management to achieve
the right goals.
Stages of Risk Management:
Meanwhile, risk mitigation carried out by risk management is generally carried out in several
stages. Starting from identification, assessment, response, to evaluation. Some of these stages
must be carried out sequentially to facilitate anticipation and handling of problems.
1.
Risk Identification
The first step taken in problem solving must be to understand what is the source of the
problem. Likewise, in risk management in the company, we must identify the possible risks
that occur in the company or organization. This identification is done because not all
businesses have the same type of risk, so the countermeasures must be adjusted to the
business objectives.
This risk identification can include various aspects related to the company and risks such as
social, economic, legal, service or product, technology to market aspects. The methods that
can be used in risk identification according to Ahmad (2021) are as follows:
a.
Risk analysis questionnaire: The risk manager must ensure that the required information
regarding the company's assets and operations is not missed.
b.
Financial statement method: This method involves analyzing financial statements,
namely balance sheets, profit and loss statements, and other financial records. Risk
managers can identify all risks related to with the company's debts, assets, and
personnel. Each estimate is analyzed in depth with regard to the possible losses that may
occur from each estimate.
c.
Flow map method: This method is used to depict all business operations from input to
output. A checklist of potential losses is also used as visible operations in the flow map,
so as to determine the losses faced by the company in question.
d.
On-site inspection method: This method is used to conduct on-site inspections of the
company's activities. Direct observations made by risk managers can yield results on
how the reality on the ground is, so that the information can be used for risk
management at a later stage.
e.
Interacting with outsiders: External parties here can be interpreted as establishing
relationships with individuals or other companies. Especially those who can assist the
company in dealing with risks such as legal counsel, consultants, management
accountants, and others. They can help in developing identification of potential losses.
f.
Statistical records of past losses: These records can be used for performance evaluation.
The performance in question is one that could potentially lead to losses and therefore
needs to be evaluated monitored and improved, such as: service quality, production
quality, and others.
g.
Environmental analysis: This step is an indispensable stage because it is useful to know
the conditions that affect the incidence of risks such as competitors, consumers,
suppliers, and others. In analyzing each component at this stage, there are several
important considerations to consider such as the nature of the relationship, its diversity
and stability. For example, direct or indirect sales of products, from producers directly
to consumers or from producers through wholesalers, new retailers to consumers, and
others.
2.
Risk Assessment
At this stage the organization or company assesses the possibility of losses that will occur.
This assessment is carried out with the aim that each risk is in the right priority. According
to Karim (2021), there are two methods of assessing risk in companies, namely:
a.
Sensitivity method
The sensitivity method is a way of measuring the impact on exposure due to the
movement of a risk variable. Measurement with the sensitivity method is widely used
because this method is the easiest technical calculation and almost all analysts and
company managers have done the sensitivity method to the decision plan. The
sensitivity method has several variables, as follows:
1)
Interest rate risk (measures changes in interest rates and financial performance).
2)
Exchange rate risk (Looking at the effect of exchange rate changes on corporate and
financial exports)
3)
Market risk
4)
Credit risk
5)
Liquidity risk
b.
Volatility method
The volatility method emphasizes the possible magnitude of the expected outcome. The
volatility method is a method that shows the magnitude of possible outcomes around the
expected outcome. Volatilities that are often used are range and standard deviation.
Where the volatility method can be calculated using standard deviation e.g. historical
data or forecasting data.
3.
Risk Response
The next risk management method is risk response. As the name implies, risk response is
carried out to select various steps or ways that can be taken in dealing with problems that
occur. Here are some risk responses that can be done according to Prabandari (2020),
namely:
a.
Risk Avoidance: the response is carried out by taking policies to stop activities that have
the potential to cause risk problems.
b.
Risk reduction: in this response actions are taken with the aim of reducing the possible
impact of the risk by controlling the internal parts of the company.
c.
Risk Sharing of Transfer: this response takes action by transferring some risks through
outsourcing, insurance or hedging.
d.
Risk Acceptance: This response does not take any action to address the risk, or in other
words, decides to accept the risk.
e.
Create a Risk Management Plan: a response that is carried out by creating appropriate
risk countermeasures according to each category.
4.
Implementation:
The next stage in risk management that can be done is the implementation stage. At this
stage it is none other than implementing all the methods that have been planned. With its
implementation, each method that has been prepared can reduce and overcome the influence
of each existing risk. In its application, it needs to be carried out according to a systematic
plan. Even so, every action taken can be adjusted to the conditions that are happening.
Because it does not rule out the possibility of various unexpected situations.
Risk management can be done through risk control and risk financing. Risk control can also
be applied by avoiding risk. We need to make a countermeasure plan for each risk that has
been identified previously, especially for critical risks. This countermeasure plan aims to
prepare the company in the event of a critical risk later experience risks as predicted.
Usually this stage can be done by insuring the health of employees, companies and others.
In its implementation, risk management itself can be done by controlling the risk itself and
by financing the risk. Risk control itself can be done in several ways, namely:
a.
Risk aversion
b.
Controlling risk
c.
Separation
d.
Polls or combinations
e.
Risk transfer
5.
Evaluation and Review
The last stage of risk mitigation carried out by risk management is to evaluate and review.
The planning that has been prepared, may not go according to the target in its
implementation. This is of course influenced by environmental factors that cannot be
predicted in advance. It is not uncommon for conditions like this to cause changes to the risk
management plan that has been made before. Therefore, even though risk management
planning has been carried out, it is not absolute, but can still change over time according to
the situation and conditions that occur. That way every leader and individual who has
responsibility in the company must adapt quickly. Because this adaptability becomes an
important requirement that must be done in addressing existing problems properly and
dynamically.
After studying some of the explanations above, it can be concluded that risk is the worst
challenge that does not necessarily occur but not necessarily can also be handled. If the risk
is not handled properly, it will cause losses to the business itself. So the existence of risk
management itself is an effort in overcoming these risks, this risk management also
emphasizes more on the process of identifying, forming strategies, measuring risks and
processing available resources as much and as well as possible. In order not to experience
unwanted risks. Or in other words, risk management becomes the management strategy of
all entrepreneurs. The focus and principles of risk management itself as identification and
how to overcome risks.
