AM Best has issued a new commentary on its country risk evaluation process in response to recent concerns about China’s economic slowdown and the government’s sovereign risk. The new Best’s Commentary addresses frequently asked questions about AM Best’s 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 credit risk and country risk.

The commentary, titled, “Frequently Asked Questions: AM Best’s Country Risk Evaluation of China,” notes that while AM Best does not issue sovereign credit ratings, it does not place a cap on an insurer’s credit rating based on the sovereign credit rating of the company’s country of domicile or to which it is materially exposed. AM Best views that an insurer can be more financially secure than the government of the country of domicile and have the ability to manage its country risk effectively, for example, by measures such as additional capital buffers, strong underwriting disciplines, or portfolio diversification.

Unlike sovereign credit risk, which measures a country’s overall capacity and willingness to pay its financial obligations, country risk considered in AM Best’s rating process incorporates the country-specific factors that could adversely affect an insurer's ability to meet its financial obligations, including the broader operating environment, economic, political and financial system risks. An insurer’s ability to address, manage and mitigate its exposures to country risk is determined on a case-by-case basis and incorporated into the analysis of balance sheet strength, operating performance and business profile.

China is classified as a CRT-3 country under this country risk analysis, the mid-range of five tiered categories, and characterised as having a low level of economic risk and moderate levels of political and financial system risk. “Barring any significant developments, AM Best does not anticipate making any changes to China’s tier status over the medium term,” said Graziano Brady, senior economist, AM Best.

While China is currently well-positioned in the CRT-3 category, the country’s economy faces a number of challenges. Major headwinds include the large off-balance sheet debt held by China’s local government financing vehicles, as well as the sluggish property sector, which is a drag on overall economic growth. However, AM Best expects that, over the short to medium term, China will deploy its fiscal and monetary tools to meet its growth targets, whilst the country goes through structural changes.

To access the full copy of this commentary, please visit http://www3.ambest.com/bestweek/purchase.asp?record_code=339734.

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 specialising 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.

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