COUNTRY RISK

COUNTRY RISK

Abstract

In this study we try to explore the concept of country risk in a holistic context. The main focus of the research is on country risk and its relation with economy. The research also analyzes many aspects of country risk and tries to gauge its effect on financial sector. Finally the research describes various factors which are responsible for country risk and tries to describe the overall effect of political risk on country risk.

Country risk

Introduction

Analyst defines country risk as the risk that country-specific factors could adversely affect an insurer's ability to meet its financial obligations. Country risk is evaluated and factored into all Analyst ratings. As part of evaluating country risk, Analyst identifies the various factors within a country that may directly or indirectly affect an insurance company. In doing so, Analyst separates the risks into three main categories: economic risk, political risk and financial system risk (Lerche 2006 1).

Literature review

Given Analyst's particular focus on the insurance industry, financial system risk is further divided into two sections: insurance risk and non-insurance financial system risk. Analyst's evaluation of country risk is not directly comparable to a sovereign debt rating, which evaluates the ability and willingness of a government to service its debt obligations. Though country risk analysis does consider the finances and policies of a sovereign government, the final assessment is not guided by this sole purpose. Additionally, Analyst's country risk evaluation does not impose a ceiling on ratings in a given domicile. Analyst's approach to country risk analysis employs a data-driven model that scores the level of risk present in a given country, plus a qualitative assessment of country-specific conditions that affect the operating environment for an insurer.

Methodology

Countries are put into one of five tiers, ranging from “CRT-1” (Country Risk Tier 1), denoting a steady natural natural natural environment with the least amount of risk, to “CRT-5” (Country Risk Tier 5) for countries that represent the most risk and, therefore, the utmost challenge to an insurer's economic stability, power and performance. In short, as country risk increases (measured by a higher assigned tier), the distribution of ratings migrates down the rating scale as the level of risk approaches CRT-5. This same relationship effectively applies to any significant category of risk an insurer faces, i.e. (Kluger 2006 23). higher risk exposure stresses financial stability. Key elements of country risk can be managed or mitigated, effectively reducing the impact on an insurer's rating. As a result, it is possible that Analyst's highest ratings can be achieved in any country. Country risk is not a ceiling or hat on insurer rankings; it is one of numerous ranking factors. Country Risk Tier assignments are reviewed annually, though significant events and developments are tracked continuously and may cause an interim change to a country's tier assignment. CRTs are assessments of the current conditions in a country, but they are designed to remain stable through the business cycle. Therefore, political and industry outlooks as well as economic forecasts are integrated into the ...