AM Best outlines country risk framework for insurers

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AM Best country risk for insurers

Highlights

AM Best assigns countries to five Country Risk Tiers (CRT-1 to CRT-5), assessing risk to (re)insurers' financial stability and performance.
Separate Country Investment Classes (CIC-1 to CIC-5) evaluate investment exposure, factoring in capital market liquidity and volatility for insurers.
Country-specific risk charges are integrated into the Best's Capital Adequacy Ratio Model, Global, potentially raising risk levels for invested assets where financial flexibility is weakened.

Country classifications and rating methodology

As reported by AM Best, the ratings agency defines country risk as the possibility that country-specific factors could hurt a (re)insurer's ability to meet its financial obligations. The framework applies not only to sovereign states but also to territories, special administrative regions, free associations, crown dependencies and constituent countries.

Under the methodology, countries are assigned to one of five Country Risk Tiers, from CRT-1 for the most stable environments with the lowest risk to CRT-5 for markets posing the greatest challenge to insurers' financial stability, strength and performance. AM Best says this country risk evaluation is incorporated into Best's Credit Ratings, but does not impose a ceiling on those ratings.

Capital markets effect and sector implications

AM Best also uses separate Country Investment Classes to measure investment-related exposure, including the potential impact of market illiquidity and volatility on insurers' portfolios. In that system, CIC-1 represents economies with relatively stable and liquid capital markets, while CIC-5 covers markets with the lowest liquidity and highest volatility.

The agency says these country-specific risk charges are built into its Best's Capital Adequacy Ratio Model, Global, allowing analysts to raise the level of risk assigned to invested assets when financial flexibility may be weakened. It also notes that the five Country Risk Tiers and five Country Investment Classes do not always move in parallel, while transfer and convertibility risk is included in its holding company and debt ratings.

Our earlier coverage on sovereign resilience in a higher-rate environment highlighted how geopolitical tensions and sustained fiscal spending are increasing refinancing pressure and borrowing risks for governments. The analysis noted that persistent shocks—along with higher energy and food costs—can weaken fiscal headroom and weigh on sovereign credit outlooks, with emerging and frontier markets particularly exposed due to heavier debt-servicing burdens and narrower revenue bases.

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