RISK MANAGEMENT

AND INSURANCE (GE31103)

1.0

INTRODUCTION

Telekom Malaysia (TM) was established as the Telecommunications Department of

Malaysia in 1946. Telecommunication services in the country were transferred
from Jabatan Telekom Malaysia to Syarikat Telekom Malaysia (STMB) in 1987 to form
the first Malaysian private company. In 1990, STMB was listed on the Main Board of
Bursa Securities, but nowadays, Telekom Malaysia Berhad Company was
Government Listed Company (GLC) with 51% of TM Company share is held
by Government of Malaysia. Telekom Malaysia (TM) is engaged in providing
integrated telecommunications solutions. It offers information and
communication services and solutions in broadband, data, and fixed-line. The
group primarily operates in Malaysia. The group operates through four
segments: retail, global, wholesale and shared services.
TM Company was a big company that always face with risk or
uncertainty that result to the lower of performance in business activities. For
that reason, we will discuss some of the risks that face by TM Company, at
the beginning of this paper, the topic that will be discussing is type of risk
that TM Company expose to and how the risks affect TM business. This is
following by the type of coverage that suitable for TM Company to insure
against the risk. After the type of coverage identified, we try to seek the
insurance company and the product that the TM Company should purchase
to ensure the risk can be managed. Lastly, we also do the analysis of TM
Company financial statement to measure the company performance and
provide a critical suggestion to TM Company about the risk may be affect to
the TM Company business.
This paper tries to explain about the nature of business that cannot run
from exposed to the various risks. By do some of research on the company
risk, a company can avoid and manage their risk. At the same time, company
can make a preparation to face the risk, either by risk retention or by
purchase insurance related to the risks.

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2.0
2.1

CRITIQUE
RISKS THAT EXIST IN TELEKOM MALAYSIA BERHAD

There are four major risks that will be exists in Telekom Malaysia Berhad
Company. This risk usually gives a negative effect to Telekom Malaysias
business performance.
1. OPERATIONAL RISK
This type of risk refer to the risk that a company or firms undertakes when it
attempts to operate within a given field or industry. Operational risk can be
summarized as a human risk, and it is the risk of business operations failing
due to human error. In TM Company cases, operational risk arises from the
employee participation. For example, the weak connection between the
upper line and their staff that causes the dissatisfaction of staff towards the
employer. This situation will lead them to create unethical behavior, such as
embezzling and theft of money. Another example if their employee did not do
a best performance regarding in doing better services to their customers, it
will lead the decreasing in their productivities. This will affect company
services level requirement, loss in performance, failure to deliver services or
a drop in services level and business continuity and availability resources.
2. SYSTEM RISK
System risk refers to the risk of collapse of an entire financial system or
entire market, as opposed to risk associated with any one individual entity,
group or component of a system that can be contained therein without
harming the entire system. In TM Company, the system risks that exist is
regarding to the information technology and physical and information
security. TM may face the problem of their information system being hacked
by stranger or their competitors. TMs intellectual property and copyright
also probably can be stolen by the hacker. Thus, physical and information
security also can be harmed by other parties. It will give a bad sign to
employment protection, customer data protection and privacy.
3. FINANCIAL RISK
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Financial risk refers to the uncertainty of loss because of adverse changes in

commodity price, interest rates, foreign exchanges rates and the value of
money. In TM Company business, there is a case, where the customers use
TM services for free. This is happen when the customer buy a broad bands
simcard from unknown party through internet. The customer only needs to
pay for the simcard price only and they can use it for many times without
paying the monthly payment. These situations lead TMs financial condition
become worst, because TM cannot detect this matter easily. In addition, this
situation also will result in reduced TM Companys loyal customers and
potential customer.
4. STRATEGIC RISK
Strategic risk refers to uncertainty regarding the firms financial goals and
objectives. Mergers acquisitions and divesture, governance, business
planning and resources allocation is the strategic risk that may exist in TM
Company. This risk involve the acquisition purchase occurs when one
company takes over another and clearly established itself as the new owner.
The target company ceases to exist, the buyer swallows the TM business
and the buyers stock continues to be traded. A merger happens when two
firms, Telekom and one other company, often of about the same size, agree
to go forward as a single new company rather than remain separately owned
and operated. Divestiture happens in TM when there is disposition or sale of
an asset by a company. Telekom divest an asset which is not performing well,
which is not vital to the company's core business or worth more to a
potential buyer.

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2.2

SUITABLE COVERAGE FOR TELEKOM MALAYSIA BERHAD TO

INSURE AGAINST THE RISK

Telekom Malaysia Berhad is the largest integrated communications solutions

provider in Malaysia and a leading regional Telco. This makes TM exposed to
a several risks like operational risk, financial risk, system risk and strategic
risk. In this topic, we will discuss about some are the coverage that suitable
to the TM Company to insure against the risk.
1. BUSINESS INCOME (INTERRUPTION OF COMPUTER OPERATION)
Business income coverage form also includes the additional coverage such
as interruption of computer operations. This coverage also applies to the
suspension of operations caused by an interruption of computer operations
from a covered cause of loss. In TM case, if their information system was
hack by a computer hacker it may caused the TM operation temporarily
suspend for several hours or a day. It will affect TM profit decline at that time.
This coverage will cover the business income los, profits are lost and certain
expenses may still continue while the suspension of the company operation.
This type of coverage will cover the system risk.
2.

FIDELITY BONDS

Fidelity bonds are coverage that provides a protection to company against

any loss arising from the act of employees that dishonest or fraudulent. In
this case, TM can manage the operational risk that include the employee
dishonesty and protect the TM business from financial loss due to the
fraudulent activities of an employee or group of employees. This coverage
also include the loss of a customers money while purchasing the TM services
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or devices that caused by dishonest acts of TM employees. More than

providing protection, this type of fidelity bond is effective in differentiating
TM business from their competitors who are not bonded for fidelity. This
coverage will cover the operational risk.
3.

CYBER RISK INSURANCE COVERAGE

This coverage will cover the loss of corporate data and information such as
intellectual property and proprietary information, which in the hands of a
competitor or even an extortionist, can severely disadvantage business. Most
high-profile stories in the media today address the type of data loss that
impacts people on a personal level: credit card numbers, medical recodes,
birth dates, ID or passport numbers and other private personal information.
So, this type of coverage is most suitable to the TM company business to
have to reduce the system risk.

4.

CREDIT INSURANCE COVERAGE

This type of coverage will cover the risk of financial loss that can occur when
trade credit is offered by a business to its corporate customers. Thus
providing a set period of credit after provision of products or services before
payment is due. In these circumstances, there is always a risk of nonpayment, either because the customer may be unable or unwilling to pay, or
because an unforeseen event prevents successful completion of the sales,
for instance, a shortage of the currency of the contract in the customers
country, or government intervention, or a natural disaster. This coverage will
cover the financial risk and strategic risk that face by TM Company if
anything possibilities happen to their financial situation.

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2.3

INSURANCE COMPANY AND PRODUCT THAT TELEKOM MALAYSIA

BERHAD SHOULD PURCHASE TO COVER THE RISK

Telekom Malaysia Berhad needs a suitable coverage to protect their business

activities. In this case our group suggests TM Company to purchase
insurance product from AIG insurance company. AIG is a world leading
property-casualty and general insurance organization serving more than 88
million clients around the world. This is one of the industries that have huge
ranges of products and services, deep claims expertise and excellent
financial strength. There are many insurance product that offered by AIG
company. Some of the products in AIG Insurance Company that TM should
purchase are:
1. SME insurance
SME refers to the small-medium sized enterprise. Under this SME insurance,
AIG insurance provide a coverage for fidelity guarantee that will cover loss of
money and property due to fraud or dishonesty of the employees. Telekom
has to purchase this product insurance to cover their operational risks that
occur because of employee that not effective while during their work. Under
this SME insurance, there is also coverage that provided to cover all risk
insurance that will cover their financial and also strategic risk. AIG Company
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provides this type of product to cover solely designed with the entire set-up
in mind which is the equipment, plant, and machinery. It also covers all risk
that occurs in organization that not covers in other type of insurance. The
consequences of property damage are wide-ranging and the potential loss
from business interruption, such as reduced productivity, can be devastating
to the balance sheet, even more so than the original loss.
2.

FINANCIAL LINES INSURANCE

AIG Insurance Company provides a financial lines insurance that able

to cover the system risk. This product involve the coverage that needed by
TM Company, like Cyber Edge and Commercial Crime. The first, Cyber Edge
will addressed the liability of companies arising from data protection laws,
the management of personal data and also the consequences of losing
corporate information.
Second, the commercial crimes will cover TM
Company from the threat of fraud not only from employees, but also from
external, intrusive and unknown third parties. The failure to protect your
assets adequately from criminal activities may have serious repercussions.

2.4

FINANCIAL STATEMENT ANALYSIS (RATIO ANALYSIS)

This Ratio analysis of Telekom Malaysia Berhad will calculate five type of
analysis to measure the TM Company performance.
1.

LIQUIDITY RATIO

Firstly, we determine the company liquidity ratios which are used to

address the firms financial health. A business can be said as financially
liquid if it is able to pay its bills on time. The companys overall liquidity can
be assessed by comparing its current assets to its current liabilities. Current
ratio is the most commonly used measure of a firms overall liquidity.
LIQUIDITY RATIO
Current ratio
= Current Asset
Current Liabilities
Quick ratio
= Cash+ Account

YEAR 2013
= 4,976,100,100
5,880,800,000
= 0.85 times
=
2,092,900,000+2,073,4

YEAR 2012
= 5,765,700,000
6,528,200,000
=0.88 times
=
3,241,600,000+1,853,60
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Receivable
Current Liabilities
Average Collection
Period
= Account
receivable_____
Annual credit sales
365 days
Account Receivable
Turnover
= ____Sales_______
Account Receivable

00,00
5,880,800,000
= 0.71 times
=
_____2,073,400,000____
9,485,000,000 365
days
=79.79 days

0,000
6,528,200,000
= 078 times
=_____1,853,600,000____
_
8,845,600,000 365
days
= 76.49 days

= 9,485,000,000
2,073,400,000
= 4.57 times

= 8,845,600,000
1,853,600,000
= 4.77 times

Based on its current ratio, TM Company had RM 0.85 in current asset for
every RM1.00 it owes in short term debt in year 2013, which decreased from
RM 0.88 in 2012. This means that the company was not able to cover its
liabilities with the current asset they own on that particular year. We used
acid-test ratio (or quick ratio) for a more stringent test of the firms liquidity,
because the companys inventory might not be very liquid at all. TM
Company appears to be less liquid than it did using the current ratio based
on the acid-test ratio. The company had RM0.84 in cash and accounts
receivable per RM1.00 in current liabilities in 2013 which decreased from
RM0.87.
Next, we determine Average Collection Period to measure how many
days the company takes to collect its receivables. We assume that the
company sales are made on credit. The company collects its accounts
receivable in 79.79 days in 2013 and 74.69 in 2012. Other than that, we may
use accounts receivable turnover ratio to measure how many times accounts
receivable are rolled over during a year. We can take note that TM collected
its accounts receivable every 79.79 days in 2013, which indicates that the
receivables were turning over at a rate of 4.57 times per year
(36579.79=4.57 times per year) and 4.57 in 2012.
2.

MARKET VALUE RATIO

Market Value Ratios answer the question: How are the firms shares valued in
the stock market? We have to look at the companys performance in terms of
how the stock market values the firms equity. Thus, we determine two

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market value ratios that indicate what investors think of the managers past
performance and the firms future prospects.
MARKET VALUE RATIO
Price Earnings ratio
= Market Price per Share
Earnings per Share
Market-to-Book-ratio
= ___Market Price per
Share
Common shareholders
Equity Common share
outstanding
3.

YEAR 2013
= __RM 5.55____
RM 0.27
= 20.56
= ___RM 5.55______
RM 7,136,700,000 RM
3,577,400,000
= 2.78

YEAR 2012
= _RM 6.04___
RM 0.30
= 20.13
= ___RM 6.04_____
RM6,894,800,000
RM 3,577,400,000
= 3.13

CAPITAL RATIO

Capital ratio is a set of ratios that measure how effectively a firm manages
its debt. In this ratio, we consider debt ratios and time interest earned ratios.
CAPITAL RATIO
Debt Ratio
= Total liability
Total Assets

YEAR 2013
= RM 13,837,400,000
RM 19,785,300,000
= 69.9%

YEAR 2012
= RM 14,916,00,0,000
RM 20,664,800,000
= 72.2%

The table shows that the Telekoms debt ratios for 2013 and 2012. Debt ratio
calculated to measure the percentage of funds provided by creditors.
Creditors prefer low debt ratios because the lower the ratio, the greater the
cushion against creditors losses in the event of liquidation. From the
calculation, Telekom Malaysia financed 69.9% of its debt in 2013 compared
in 2012 with average 72.2%. Thus, Telekom Malaysia used significantly more
debt in 2012 than the average in 2013.
4.

EFFECIANCY RATIO

Efficiency ratio is measures how effectively the firm is using its assets to
generate sales. Efficiency ratios consist of total asset turnover ratio and fixed
asset turnover ratio.
EFFECIANCY RATIO
YEAR 2013
YEAR 2012
Total Asset Turnover
= RM 9,485,500,000
= RM 8,845,600,000
Ratio
RM 19,785,300,000
RM 20,664,800,000
= Sales
= 0.48 times
= 0.43 times
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Total asset
Fixed Asset Turnover
=_____Sales__________
Net plant &
Equipment

= RM 9,485,500,000
RM 10,906,800,000
= 0.87 times.

= RM 8,845,600,000
RM 11,041,600,000
= 0.80 times.

The total asset turnover ratios calculate to measure of how well the firms
assets managed. In the above table, it appears that Telekom Malaysia using
its asset more efficiently in 2013 compared with 2012 because it generates
about RM 0.48 in sales per ringgit of asset. In contrast, in 2012 produce a bit
low than 2013 that is RM 0.43 in sales per ringgit of asset. Regarding how
efficiently Telekom Malaysia management utilize their investment, the
company appears to have managed the use of fixed asset more efficiently in
2013 than in 2012 with both 0.87 and 0.80 in 2013 and 2012.
5.

PROFITABILITY RATIO

Profitability are used to measure how well the firm control its cost of goods
sold, operating expenses, finance cost, and other expenses relative to each
of dollar firm sales and also to measure how effective the firms
management at using firms assets to generate sales.
PROFITABILITY RATIO
YEAR 2013
YEAR 2012
Operating
Profit
= RM 1,298,300,000
= _RM 907,300,000_
margin
RM 9,485,500,000
RM 8,845,600,000
= Net operating income
= 13.7%
= 10.2%
sales
Net Profit Margin
= RM 972,800,000
= RM 1,081,100,000
= Net Income
RM 9,485,500,000
RM 8,845,600,000
Sale
= 10.25%
= 12.2%
Return on Equity
= RM972,800,000
= RM 1,081,100,000
= ___Net Income _
RM5,947,900,000
RM 5,748,800,000
Common Equity
=16.4%
= 18.8%
Operating return on
= RM 1,298,300,000
= RM 907,300,000
assets
RM 19,785,300,000
RM 20,664,800,000
= Net Operating Income
= 6.6 %
= 4.4 %
Total assets
Based on the operating profit margin above, it shows that Telekom doing a
good job in managing firm operating expenses 2013 with 13.7% compared to
10.2% in 2012. Based on the 2013 net operating income, every ringgit of
sale of Telekom Malaysia keeps RM 0.1025 or 10.25% profit after paying all of
their firm expenses whereas in 2012, Telekom Malaysia earned RM 0.122
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(12.2%) where it is better than 2013. The return on equity for 2012 & 2013
are 16.4% and 18.8% respectively. Hence, Telekom Malaysia receives higher
return on equity on 2013 than 2012. As for the operating returned on asset,
in 2013, Telekom Malaysia generated RM 0.066 or 6.6% operating profit for
every RM 1 of its invested asset. It is better than 2012, which generated RM
0.044 or 4.4% for every RM 1 of their asset.

2.5

CRITICAL SUGGESTION ABOUT THE RISK THAT MAYBE AFFECT

TO THE BUSINESS

Among the risk that may affect the business is insufficient information
to turn demand into value. Companies need accurate, timely and
comprehensive business intelligence and customer analytics to drive
profitable customer propositions. The right operational support and billing
system is also important. It may also undermine the potential returns on the
company ongoing investments. TM needs to be able to meet the demand for
telecommunication service especially in the rural areas. There are still many
places in Malaysia which have not received the UNIFI service.
TM Company also may face failure to shift the business model from
minutes to bytes. Operators must respond to changes due to aggressive
moves by competitors entering from other sectors and rapid change in
telecoms established value chains. Operators should raise their sights to
target revenues from new services that tap into rising demand. They must
adapt to a wider ecosystem and make decisions on which revenue they must
target within that broader environment. TM may consider to provide a
portable modem to use wifi service like what is being offered by Docomo
Company in Japan. This service is user friendly and it receives a better signal
compared to internet services offered by companies like Maxis and Digi
which does not satisfy customer requirement to use a high speed data
connection at all times.
Lastly, TM Company faces risk of disengagement from the changing
customer mindset. Customer expect to have a better service from TM, if they
are not able to meet customer expectation, TM might be losing a lot of
customer. Operators are obligated to adapt their service offerings and
customer experience to sustain and build customer engagement.
(2907 words)

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3.0

CONCLUSION

As a conclusion, every company that runs a business will always exposed to

the several of risk. The risk leads the company performance become worst,
profit and return decline, failure to meet business targets, drop in
productivity, and drop in share and more. This entire thing happens if the
company did not know on how to manage their company risk. Risk
management team is a crucial part of every company should have to analyze
and identify the risk. After the risk identified the company should implement
the framework on how to manage the risk, what are the type of coverage
that suitable to reduce the impact of the risk. This is same goes to Telekom
Malaysia Company. As we go through this company profile, we realize several
of risk that exists in TM Company gives a big damage and loss to the
company if the risk is not controlled. We also try to find what the coverage
that can help to reduce the risk. We also seek for the Insurance Company
that provides the suitable coverage in their insurance policy based on the TM
company risk. Even though TM may have an insurance policy, this company
may also have their own insurance or pooling fund to insure any liability
arising from the risks that exist in their company, since TM is a big company
that need a huge of fund to recover any losses or damage in their company.
Like what we already know that if any catastrophic damage occurs,
Insurance Company may not able cover the damage because of the
insufficient fund to pay the claim. In this short assignment, our group learns
so many things related to the main topic. We realize it know on how
important the risk in business to be identify, and how critical the coverage to
be prepared to face the risk.

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4.0

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