Best’s Commentary: AM Best Issues FAQ on Best’s Credit Ratings, Sovereign Credit Risk and Country Risk

The spread of the COVID-19 virus outbreak and resulting economic volatility has heightened sovereign credit risk concerns. Although AM Best does not issue ratings on government debt, it considers such risks through its country risk analysis, which is factored into all of Best’s Credit Ratings. A new Best’s Commentary addresses frequently asked questions about its handling of sovereign credit risk and seeks to clarify how these issues are incorporated into the ratings process, and to explain the differences between sovereign ratings and country risk tiers.

The commentary, titled, “Best’s Credit Ratings, Sovereign Credit Risk, and Country Risk FAQs,” notes AM Best’s country risk analysis encompasses the broader operating environment, focusing on the economic, political and financial system risks in a given country. An insurer’s ability to address, manage and mitigate its exposures to country risk is determined on a case-by-case basis and it is incorporated into the analysis of balance sheet strength, operating performance and business profile.

Unlike sovereign credit risk, which measures a country’s overall capacity and willingness to pay its financial obligations, country risk incorporates the country-specific factors that could adversely affect an insurer's ability to meet its financial obligations. Sovereign ceilings, which require that ratings remain at or below the sovereign rating of a company’s country of domicile, are not applied in AM Best’s rating process, as an insurer can be more financially secure than the government of the country in which it is domiciled and have the ability to manage its country risk effectively.

Some of the issues the commentary also addresses include:

• An explanation of AM Best’s Country Risk Tiers and the key metrics used in this analysis;
• The considerations made when gauging the impact of country risk on a company’s ratings assessment; and
• An understanding of how AM Best considers sovereign credit risk in its rating process.

To access the full copy of this commentary, please visit http://www3.ambest.com/bestweek/purchase.asp?record_code=295899.

To view Country Risk Assessment Reports providing economic, political and financial system risk assessments on more than 130 countries, please visit AM Best’s Country Risk webpage.

AM Best is a global credit rating agency, news publisher and data analytics provider specializing in the insurance industry. Headquartered in the United States, the company does business in over 100 countries with regional offices in New York, London, Amsterdam, Dubai, Hong Kong, Singapore and Mexico City. For more information, visit www.ambest.com.

Copyright © 2020 by A.M. Best Rating Services, Inc. and/or its affiliates. ALL RIGHTS RESERVED.

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