Country Risk Global Report

AMB Country Risk Report: Global Summary

September 2009

AMB Country Risk Report: Global Summary Table of Contents

Introduction 1

Tier Characteristics 2

EconomicRisk 2 PoliticalRisk 4 FinancialSystemRisk 6

Regional Analysis 8

Asia-Pacific 9 CentralAsiaandEasternEurope 13 LatinAmericaandCaribbean 16 MiddleEastandNorthernAfrica 19 NorthAmerica 22 Sub-SaharanAfrica 25 WesternEurope 28

Conclusion 31

Rating Analysts

EdwardEasop,VicePresident+1(908)[email protected]

AndreaKeenan,ManagingSeniorFinancialAnalyst,CountryRiskGroup+1(908)[email protected]

JamesGillard,SeniorFinancialAnalyst,CountryRiskGroup+1(908)[email protected]

A.M.Bestdefinescountryriskastheriskthatcountry-specificfactorscouldadverselyaffecttheclaimspayingabilityofaninsurer.CountryriskisfactoredintoallA.M.Bestratings.A.M.Best’scountryriskmethodology,Assessing Country Risk,presentsthecountryriskevaluationprocessanddescribeshowcountryriskisintegratedintoBest’sCreditratings.

OnApril8,2009,thenewcountryriskmethodologyandCountryRiskTiers(CRTs)werereleased.Onthatdate,implementationofthenewmethodologycommenced.Bothareavailableatwww.ambest.com.

OnAugust31,2009anewreleaseoftheCountryRiskTierswaspublished,markingthestartofanannualcyclethatwillculmi-natewitharevisedlistofCRTsandupdatedAMBCountryRiskReportsbeingreleasedattheendofAugusteachyear.

The75countriesevaluatedbyA.M.BestarelistedaccordingtotheirCountryRiskTierinthetabletotheright.TwocountrieschangedTierssincethelastreleaseinApril.Antigua&BarbudamovedfromaCRT-3toaCRT-4andBosniaandHerzegovinamovedfromaCRT-4toaCRT-5.

Thepurposeofthisreportistosupplementthemethodology,summarizetheoutputoftheA.M.BestCountryRiskModel,andidentifythecharacteristicsexhibitedbyeachofthepeergroups.ItthereforealsoservesasacompilationoftheinformationthatcanbefoundintheindividualAMBCountryRiskReportsthatareavailableontheA.M.Bestwebsite.

Thereportisbrokendownintotwomainparts.Thefirstsectiondiscusseseconomic,political,financialandinsurancestatisticsofcountriesinagiventier.Thesecondlooksatthecountriesinaregionalcontext.

Thisreportdoesnotprovideanalysisbeyondtheresultsofthecountryriskevaluationprocess.MoredetailedstudiesonspecificinsuranceindustriesormarketsareavailableasSpecialReportsatwww.ambest.com.

*DenotesCountriestobeconsidered“SpecialCases”byA.M.Best.Foranexplanationofa“specialcase”andmoreinformationontheCountryRiskMethodologypleaseseeAssessingCountryRiskat:http://www.ambest.com/ratings/countryrisk.pdf.


Copyright©2009byA.M.BestCompany,Inc.Allrightsreserved.Nopartofthisreportmaybereproduced,storedinaretrievalsystemortransmittedinanyformorbyanymeans;electronic,mechanical,photocopying,recordingorotherwise.1

AustraliaAustriaCanada

DenmarkFinlandFrance

GermanyGibraltar*Guernsey*

IsleofMan*LuxembourgNetherlands

NorwaySingaporeSweden

SwitzerlandUnitedKingdom

UnitedStates

CRT-1

Barbados*BelgiumBermuda

BritishVirginIslands*

CaymanIslands*HongKong

ItalyIreland

JapanLiechtenstein*

MacauNewZealand

SloveniaSouthKorea

SpainTaiwan

CRT-2

Bahamas*BahrainChina

CyprusIsrael

KuwaitMalaysiaMexico

NetherlandsAntilles*

Oman

PolandQatar

SaudiArabiaSouthAfrica

ThailandTrinidadand

TobagoUnitedArabEmirates

CRT-3

Antigua&Barbuda*

BruneiDarussalamEgyptIndia

IndonesiaJamaicaJordan

KazakhstanMauritiusMoroccoPanama

PhilippinesRussiaTunisiaTurkey

CRT-4

BelarusBosniaand

HerzegovinaDominicanRepublic

Ghana

KenyaLebanonNigeriaUkraineVietnam

CRT-5


Tier CharacteristicsThissectionofthereportexaminesthegeneralcharacteristicstypicaltoacountryinagiventier.Itisorganizedtomatchthe3broadcategoriesofriskoutlinedinthecountryriskmethodology.Thesecategoriesofriskare(1)EconomicRisk;(2)PoliticalRiskand(3)FinancialSystem(bothnon-insuranceandinsurance)Risk.

Asthereareonlyfivecategoriesofcountryrisk,significantdifferencescanbeseen,onaverage,fromonetiertothenext.Onaverage,insurersdomiciledoroperatingincountriesclassifiedasCRT-3,CRT-4orCRT-5,tendtobeimpactedmorebycountryriskthanthoseinsurersdomiciledoroperatinginCRT-1orCRT-2countries.However,differentiationbetweencountriesinCRT-1andCRT-2isnecessaryasanimportantlineexistsbetweenthosecountriesthatarerelativelylowriskcomparedtothosethatarestableandwelldiversifiedbuthavesomesignificantweaknesses.

Economic RiskEconomicriskisthelikelihoodthatfundamentalweaknessesinacountry’seconomywillcauseadversedevelopmentsforaninsurer.A.M.Best’sassessmentofeconomicriskevaluatesthestateofthedomesticeconomy,governmentfinancesandinternationaltransactions,aswellasprospectsforgrowthandstability.

Inderivingeconomicrisk,A.M.Best’scountryriskmodelemploysaweightedaverageofscorescalculatedfromeconomicvariables.Thefinalresultcategorizescountries’economicriskintooneoffivelevelsofrisk,rangingfromVeryLowtoVeryHigh.Belowisasummaryoftheresults.Note:April’smodelresultsareincludedinparenthesisifdifferentfromcurrentresults.

Astheabovetableillustrates,economicrisktypicallyisverylowinCRT-1countriesandhighinCRT-5countries.ComparingthecurrentresultswiththosepublishedinAprilwecanseethatingeneralthelevelofeconomicriskhasrisen.Toillustratetheresults,Figures1and2belowareaveragevaluesineachtieroftwoofthemostsignificantindicatorsofeconomicrisk;overallwealthandeconomicsize.



Wealth

OneofthemosttellingindicatorsinA.M.Best’sassessmentofeconomicriskisgrossdomesticproduct(GDP)percapita.Figure 1showstheaverageGDPpercapitaincountriesinCRT-1throughCRT-5.ThenumbersareasimplearithmeticaverageandhavenotbeenGDP-weighted.Inaddition,specialcaseshavebeenremovedaseconomicriskiscaptureddifferentlyforthesecountriesandtheirinclusionintheaveragewoulddistorttheresultsinanuninformativeway.

Size

Figure 2showstheaveragesizeofaneconomy(asmeasuredbynominalGDPinUSdollars)byCountryRiskTier.Againthesearesimpleaveragesandspecialcaseshavebeenremoved.

Countriesinhighertiers[CRT-1beingthehighest]aregenerally(onaverage)largerandmorewealthythancountriesinlowertiers[CRT-5beingthelowest].Andwhilemanyotherindicatorsareusedintheassessmentofeconomicrisk,thesetwo,particularlyGDPpercapita,arehighlyillustrativeofthelevelofeconomicrisk.

Figure 1GDP Per Capita

Source: IMF World Economic Outlook

$35,932

$25,651

$3,509

$57,209

$7,442

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Figure 2Gross Domestic Product (Billions, USD)


$1,036

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$1,971

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Political RiskPoliticalriskisthelikelihoodthatgovernmentorbureaucraticinefficiencies,societaltensions,inadequatelegalsystemorinternationaltensionswillcauseadversedevelopmentsforaninsurer.Politicalriskcomprisesthestabilityofagovernmentandsociety,theeffectivenessofinternationaldiplomaticrelationships,thereliabilityandintegrityofthelegalsystemandofthebusinessinfrastructure,theefficiencyofthegovernmentbureaucracyandtheappropriatenessandeffectivenessofthegovernment’seconomicpolicies.

Aswasthecasewitheconomicrisk,eachcountry’spoliticalriskisscoredfromVeryLowtoVeryHigh.Thefollowingtableshowsthedistributionofthesescoresacrosstiers.Note:April’smodelresultsareincludedinparenthesisifdifferentfromcurrentresults.

Political Risk Summary

ThePoliticalRiskSummaryisaradarchartthatsummarizesportionsofthemodeloutputonPoliticalRiskandisincludedoneachAMBCountryRiskReportpublished.Itprovidesthescoresforsomeofthemajorcategoriesofpoliticalrisk.Thechartdisplaysascoreof1-5for9differentaspectsofpoliticalriskwith1beingthelowestlevelofriskand5beingthehighest.Thepointsonthechartaredefinedasfollows.

• International Transactions Policy–measurestheeffectivenessoftheexchangerateregimeandcurrencymanagement.

• Monetary Policy–measurestheabilityofacountrytoeffectivelyimplementmonetarypolicy.

• Fiscal Policy–measurestheabilityofacountrytoeffectivelyimplementfiscalpolicy.

• Business Environment–measurestheoverallqualityofthebusinessenvironment,andeaseofdoingbusiness.

• Labor Flexibility–measurestheflexibilityofthelabormarket,includingacompany’sabilitytohireandfireemployees.

• Government Stability–measuresthedegreeofstabilityinthegovernment.• Social Stability–measuresthedegreeofsocialstabilityincludinghuman

developmentandpoliticalrights.• Regional Stability–measuresthedegreeofstabilityintheregion.• Legal System–measuresthetransparencyandlevelofcorruptioninalegalsystem.




0

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5In terna tiona l T ransactions P o licy

M onetary P o licy

F isca l P o licy

B us iness E nvironm ent

Labor F lex ib ilityG overnm ent S tab ility

S oc ia l S tab ility

R eg iona l S tab ility

Lega l S ystem

C R T -1 C R T -2C R T -3 C R T -4C R T -5

Figure 3Political Risk Summary across Country Risk Tiers

Score1(best)to5(worst)

Source: A.M. Best


Financial System RiskFinancialsystemrisk(non-insurance)istheriskthatfinancialvolatilitymayeruptduetoinadequatereportingstandards,weakbankingsystemsorassetmarketsorpoorregulatorystructure.Non-insurancefinancialsystemriskconsidersacountry’sbankingsystem,accountingstandardsandgovernmentfinances,anditassesseshowvulnerablethefinancialsystemistoexternalorinternalvolatility.BaselII,WorldBankInsolvencyPrinciplesandInternationalAccountingStandardsallarereferencedintheanalysis,asaretheperformancesofbanks,equityindicesandfixed-incomesecurities.Insuranceriskistheriskthattheinsuranceindustry’slevelsofdevelopmentandpublicawareness;transparencyandeffectivenessofregulation;reportingstandards;andregulatorysophisticationwillcontributetoavolatilefinancialsystemandcompromiseaninsurer’sabilitytopayclaims.TheassessmentisbasedheavilyontheInsuranceCorePrinciples(ICP)oftheInternationalAssociationofInsuranceSupervisors(IAIS).A.M.Bestemploysasizablesubsetofthe28ICPsbyorganizingthemintothreecategories:1)governmentcommitmenttoanopenandwell-regulatedinsuranceindustry,2)adequacyofsupervisoryauthorityanditssupportinginfrastructure,and3)insureraccountability.

Aswasthecasewitheconomicandpoliticalrisk,eachcountry’sfinancialsystemriskisscoredfromVeryLowtoVeryHigh.Thefollowingtableshowsthedistributionofthesescoresacrosstiers.Note:April’smodelresultsareincludedinparenthesisifdifferentfromcurrentresults.

FinancialsystemriskislowerinCRT-1,CRT-2andCRT-3thanitisinCRT-4andCRT-5.Inadditionthereisapronouncedshiftinthescores,particularlyintheCRT-5countries.Scoreshaverisenanditisclearthattheglobalfinancialturmoilofthepastyearhasincreasedtheamountoffinancialsystemriskinmanyofthecountriesbeingevaluated.

Financialsystemriskisacombinationofnon-insurancefinancialsystemriskandinsurancerisk.Factorsinvolvedintheassessmentofthisriskarediverseandincludefinancialmarketperformance,regulatorycompliance,bankingsystemsoundnessandadherencetoinsurancecoreprinciples.Assuch,thereisnotoneindicatorthatcansimplybeaveragedacrosstierstoillustratefinancialsystemrisk.



Toillustratetherelationshipidentifiedbetweendevelopmentofafinancialsysteminfrastructureandmaturityofaninsuranceindustry,itisinterestingtoillustrateacomparisonoftheratiooftotalpremiumswrittentogrossdomesticproductacrosstiers(andthenregions).ThisnumberisnotadirectinputtotheCountryRiskModel.ThisnumberwascalculatedbyaveragingtotalpremiumsacrossthetieranddividingbytheaverageGDPinthetier.

ThereisaverylargedropoffinthisratiofromCRT-2toCRT-3,illustratingthatthetypicalCRT-1andCRT-2countryhasadevelopedandmatureinsuranceindustrywhiletheothertiersrepresentmoreemergingmarkets.

Figure 4Total Premiums/Gross Domestic Product

Source: IMF World Economic Outlook, Swiss Re and A.M. Best

9.2%

3.4%

2.5%

1.6%

8.7%

0%

1%

2%

3%

4%

5%

6%

7%

8%

9%

10%




Regional AnalysisThesecondpartofthisreportlooksatthesamedataandinformationbutratherthanaggregateitbyCountryRiskTier,itwillbeaggregatedbyregion.Forthefollowinganalysiseachcountryisplacedintooneofsevenregionsasfollows.


*DenotesCountriestobeconsidered“SpecialCases”byA.M.Best.Foranexplanationofa“specialcase”andmoreinformationontheCountryRiskMethodologypleaseseeAssessingCountryRiskat:http://www.ambest.com/ratings/countryrisk.pdf.

AustraliaBruneiDarussalamChinaHongKongIndiaIndonesiaJapanMacau

MalaysiaNewZealandPhilippinesSingaporeSouthKoreaTaiwanThailandVietnam

BelarusBosniaandHerzegovinaKazakhstan

PolandRussiaSloveniaUkraine

AntiguaandBarbuda*Bahamas*Barbados*BritishVirginIslands*CaymanIslands*DominicanRepublic

JamaicaMexicoNetherlandsAntilles*PanamaTrinidadandTobago

BahrainCyprusEgyptIsraelJordanKuwaitLebanon

MoroccoOmanQatarSaudiArabiaTunisiaTurkeyUnitedArabEmirates

Bermuda*Canada

UnitedStates GhanaKenyaMauritius

NigeriaSouthAfrica

AustriaBelgiumDenmarkFinlandFranceGermanyGibraltar*Guernsey*IrelandIsleofMan*

ItalyLiechtenstein*LuxembourgNetherlandsNorwaySpainSwedenSwitzerlandUnitedKingdom

Asia-Pacific Central Asia and Eastern Europe

Latin America and Caribbean Middle East and Northern Africa

North America Sub-Saharan Africa

Western Europe


ThefollowingchartdescribesthedistributionofCountryRiskTierassignmentsacrosseachregion.Note:numbersinparenthesisareApril’sresultsifdifferentfromcurrentresults.

ThemajorityoftheCRT-1countriesarelocatedinNorthAmericaandWesternEurope.Theothertiersaremoreevenlydistributedacrosstheregions.TwocountrieschangedCountryRiskTiersduringthiscycle.BosniaandHerzegovina,inEasternEurope,movedfromaCRT-4toCRT-5andAntiguaandBarbuda,intheCaribbean,movedfromaCRT-3toaCRT-4.

Theremainderofthissectionwillwalkthrougheachregion.Eachregionalsectionwillstartwithabriefregionalcomment[originallypublishedintheAMBCountryRiskReports]andthendiscusstheperformanceoftheregioninthethreecategoriesofriskthathavepreviouslybeenidentified.

Asia-Pacific

Asia-Pacificcanbebrokendownintofoursub-regions.

Eastern Asia

•EasternAsiaishometosomeoftheworld’slargestandmostadvancedeconomies.ChinaandJapanarebothintheworld’stopfivecountriesmeasuredbygrossdomesticproduct(GDP).

•IntheaftermathoftheSoutheastAsianfinancialcrisisinthelate1990s,muchoftheregionunderwentarestructuringoftraditionaleconomicandfinancialpracticestomatchinternationalbestpracticesinregulation.

•Theregionasawholeisfacingtheprospectofeconomiccontractionin2009butgrowthisexpectedtoreturnin2010.

AMB Country Risk Report: Global Summary* Denotes Countries to be considered “Special Cases” by A.M. Best. For an explanation of a “special case” and more information on the Country Risk Methodology please see Assessing Country Risk at: http://www.ambest.com/ratings/countryrisk.pdf.

The following chart describes the distribution of Country Risk Tier assignments across each region. Note: numbers in parenthesis are April’s results if different from current results.

Country Risk Tier by Region Region CRT-1 CRT-2 CRT-3 CRT-4 CRT-5 TotalAsia-Pacific 2 6 3 4 1 16Central Asia and Eastern Europe 0 1 1 2 (3) 3 (2) 7

Latin America and Caribbean 0 3 4 (5) 3 (2) 1 11

Middle East and Northern Africa 0 0 8 5 1 14

North America 2 1 0 0 0 3Sub-SaharanAfrica 0 0 1 1 3 5

Western Europe 14 5 0 0 0 19Total 18 16 18 15 8 75

The majority of the CRT-1 countries are located in North America and Western Europe. The other tiers are more evenly distributed across the regions. Two countries changed Country Risk Tiers during this cycle. Bosnia and Herzegovina, in Eastern Europe, moved from a CRT-4 to CRT-5 and Antigua and Barbuda, in the Caribbean, moved from a CRT-3 to a CRT-4.

The remainder of this section will walk through each region. Each regional section will start with a brief regional comment [originally published in the AMB Country Risk Reports] and then discuss the performance of the region in the three categories of risk that have previously been identified.

Asia-Pacific

Asia-Pacific can be broken down into four sub-regions.

Eastern Asia • Eastern Asia is home to some of the world’s largest and most advanced

economies. China and Japan are both in the world’s top five countries measured by gross domestic product (GDP).

• In the aftermath of the Southeast Asian financial crisis in the late 1990s, much of the region underwent a restructuring of traditional economic and financial practices to match international best practices in regulation.

8

17(18) 9(8)


Oceania

•Oceania,whoselargesttwonations,AustraliaandNewZealand,makeupthevastmajorityofeconomicactivity,islocatedintheSouthPacificOcean.AustraliaandNewZealandhavestrongpoliticalandculturaltieswiththeUnitedKingdom.

•AustraliaandNewZealandhavecloseeconomictieswithSoutheastAsiaandin2009ASEAN-AustraliaandNewZealandFreeTradeArea(AANZFTA)wasestablished.

•TheglobaleconomicslowdownisimpactingtheregionastheeconomiesofbothAustraliaandNewZealandaresettocontractin2009.

South Central Asia

•TheregionofSouthCentralAsia,comprisingthecountriessouthoftheHimalayans,isdominatedinpopulationandeconomicsizebyIndia.

•StrategicinlocationasitisborderedbyChina,CentralAsiaandtheMiddleEast,thisregioncontainsacrosssectionofculturesandhistoriesandispronetoperiodsofregionalinstability,particularlybetweenPakistanandIndia.

•MuchofSouthCentralAsiahadbeencolonizedbytheUnitedKingdompriortoWorldWarII.AstrongrelationshipbetweenthesubcontinentandtheUKremains.

Southeast Asia

•SoutheastAsiaisacriticalpartoftheworldtradingsystemandwhiletheregion’seconomiesremainsomewhatdependentonagriculture,manufacturingandserviceshavebeentheengineforgrowth.

•2009-2010areforecastedtobeverydifficulttimesfortheregion.InfactforecastssuggesttheseshouldbetheworstyearssincetheAsianfinancialcrisisin1997-1998.Withtheeconomiesoftheirlargetradingpartnersslowingsignificantly(notablyU.S.andEurope)demandforexportsisplummetingandleadingtoeconomiccontractionacrosstheregion.Atthesametimeasglobalcredittightens,theamountofforeigndirectinvestmentflowingintotheeconomiesisdryingup.


• The region as a whole is facing the prospect of economic contraction in 2009 but growth is expected to return in 2010.

Oceania• Oceania, whose largest two nations, Australia and New Zealand, make up the vast

majority of economic activity, is located in the South Pacific Ocean. Australia and New Zealand have strong political and cultural ties with the United Kingdom.

• Australia and New Zealand have close economic ties with Southeast Asia and in 2009 ASEAN-Australia and New Zealand Free Trade Area (AANZFTA) was established.

• The global economic slowdown is impacting the region as the economies of both Australia and New Zealand are set to contract in 2009.

South Central Asia • The region of South Central Asia, comprising the countries south of the

Himalayans, is dominated in population and economic size by India. • Strategic in location as it is bordered by China, Central Asia and the Middle East,

this region contains a cross section of cultures and histories and is prone to periods of regional instability, particularly between Pakistan and India.

• Much of South Central Asia had been colonized by the United Kingdom prior to World War II. A strong relationship between the subcontinent and the UK remains.

Southeast Asia • Southeast Asia is a critical part of the world trading system and while the region’s

economies remain somewhat dependent on agriculture, manufacturing and services have been the engine for growth.

• 2009-2010 are forecasted to be very difficult times for the region. In fact forecasts suggest these should be the worst years since the Asian financial crisis in 1997-1998. With the economies of their large trading partners slowing significantly (notably U.S. and Europe) demand for exports is plummeting and leading to economic contraction across the region. At the same time as global credit tightens, the amount of foreign direct investment flowing into the economies is drying up.

Asia-Pacific Risk Category Very Low Low Moderate High Very High Economic 1 (3) 7 (6) 6 (5) 2 0Political 2 (4) 6 (4) 3 (2) 5 (6) 0Financial System 4 (5) 5 (4) 3 2 (3) 2 (1)

Economic Risk

Since the last release of Country Risk Tiers, in April, the level of economic risk in the region has risen. In April three countries displayed very low levels of economic risk, now there is only one (Australia).

9


Economic Risk

SincethelastreleaseofCountryRiskTiers,inApril,thelevelofeconomicriskintheregionhasrisen.InAprilthreecountriesdisplayedverylowlevelsofeconomicrisk,nowthereisonlyone(Australia).

Figure 5showsthelevelofpercapitaGDPintheAsia-Pacificregionasitcomparestotheaveragesforeachtieraverage.IntermsofGDPpercapitatheregion,asawhole,issimilartotheCRT-3average.Thisisnotsurprisinggiventhedistributionoftiersintheregion.Thewealthiest(intermsofGDPpercapita)countriesintheregionareAustralia,MacauandSingaporewhilethepoorestareVietnamandIndia.

Figure 6showsgrossdomesticproductforthesamesetofcountries.IntermsofeconomicsizetheregiononaverageislargerthantheaverageCRT-3countrybutsmallerthantheaverageCRT-2country.Theregionboaststwoofthethreelargest(intermsofnominalGDP)economiesintheworldwithJapanandChina.MacauandBruneiDarussalamareverysmallcountriesandthetwosmallestintheregion.



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Political Risk

Figure 7comparesthecomponentsofpoliticalriskinAsia-PacifictotheaveragesforeachCountryRiskTier.

Againnotsurprisingly,giventhedistributionofscores,onaveragecountriesintheAsia-PacificscoreworsethantheaverageCRT-2countrybutbetterthantheaverageCRT-3country.AustraliaandNewZealandscorethebestintheregionintermsofpoliticalrisk.

Financial System Risk

Thefinalcategoryofrisktobeexaminedisfinancialsystemrisk.InAsia-Pacific,relativetoothertypesofrisk,financialsystemriskisthemostwidelydistributedcategorywithscoresrangingfromveryhightoverylow.

CountriesintheregionwiththemostpremiumswrittenasapercentofGDPincludeHongKong,SouthKoreaandTaiwanwhileVietnam,IndonesiaandThePhilippinesareamongthelowest.

Figure 7Political Risk Summary – Asia-Pacific


0

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5In te rna tiona l T ransactions P o licy

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B usiness E nvironm ent


S ocia l S tab ility


Lega l S ystem

C R T -5 C R T -4C R T -3 C R T -2C R T -1 A s ia-P ac ific


Figure 8 Total Premiums/Gross Domestic Product


0%

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C R T -1 C R T -2 A s ia-P ac ific C R T -3 C R T -4 C R T -5

Source: A.M. Best


Central Asia and Eastern EuropeThisregionismadeupoftwosub-regions,CentralAsiaandEasternEurope.

Central Asia

•TheCentralAsiancountriessurroundingtheCaspianSea,withtheexceptionofIran,areallatvariousstagesoftransitionsincethecollapseoftheUnionofSovietandSocialistRepublics(U.S.S.R.).AllCentralAsiancountriesevaluatedbyA.M.Besthavehighriskscoresforpoliticalrisk.

•Thetransitionprocesshadbeenfurthercomplicatedbythepresenceofmajorpetroleumandnaturalgasresources,thepoliticssurroundingtheexportofthoseresources,andcontinuinghistoricalandethnictensions.

•Oilexportersandthosethatfinanceddomesticlendingwithforeigncapitalareundersignificantfinancialstraininthisregion,andglobalforecastshavebeendowngradedtosuggesteconomiccontractionacrosstheregion.

Eastern Europe

•EasternEuropeancountriesareallatvariousstagesoftransitionsincethecollapseoftheUnionofSovietandSocialistRepublics(U.S.S.R.).Formost,thetransitionprocessinvolvedtheadoptionofentirelynewregulatory,legalandeconomicphilosophieswhilecombatingculturaland/orhistoricaltensions.

•Allclassifiedas“emergingmarket”countries,somehavemanagedtoachieveagreatdealofeconomicstabilityandpoliticalpower,particularlythosethathavesecuredmembershipintheEuropeanUnion(EU)andsome,eventheeuro-zone.

•EasternEuropeshowsagreatdealofpotentialandinrecentyearshasbeenafavoriteregionforforeigninvestorsfromdevelopednations.

AMB Country Risk Report: Global SummaryFigure 8: Total Premiums/Gross Domestic Product


Countries in the region with the most premiums written as a percent of GDP include Hong Kong, South Korea and Taiwan while Vietnam, Indonesia and The Philippines are among the lowest.

Central Asia and Eastern Europe

This region is made up of two sub-regions, Central Asia and Eastern Europe.

Central Asia • The Central Asian countries surrounding the Caspian Sea, with the exception of

Iran, are all at various stages of transition since the collapse of the Union of Soviet and Socialist Republics (U.S.S.R.). All Central Asian countries evaluated by A.M. Best have high risk scores for political risk.

• The transition process had been further complicated by the presence of major petroleum and natural gas resources, the politics surrounding the export of those resources, and continuing historical and ethnic tensions.

• Oil exporters and those that financed domestic lending with foreign capital are under significant financial strain in this region, and global forecasts have been downgraded to suggest economic contraction across the region.

Eastern Europe • Eastern European countries are all at various stages of transition since the collapse

of the Union of Soviet and Socialist Republics (U.S.S.R.). For most, the transition process involved the adoption of entirely new regulatory, legal and economic philosophies while combating cultural and / or historical tensions.

• All classified as “emerging market” countries, some have managed to achieve a great deal of economic stability and political power, particularly those that have secured membership in the European Union (EU) and some, even the euro-zone.

• Eastern Europe shows a great deal of potential and in recent years has been a favorite region for foreign investors from developed nations.

Central Asia and Eastern Europe Risk Category Very Low Low Moderate High Very High Economic 0 1 3 (4) 3 (2) 0Political 0 1 1 5 0Financial System 0 2 0 3 2

11


Economic Risk

Figure 9illustratestheaveragewealthofcountriesinthisregion.OnaveragecountriesinthisregionarejustslightlywealthierthantheaverageCRT-4country.SloveniahasasignificantlyhigherGDPpercapitathantherestofitsregionalpeers,whileUkraineandBosniaandHerzegovinahavethelowestintheregion.

Figure 10illustratestheaveragewealthofcountriesinthisregion.AgainonaveragecountriesinthisregionareofsimilareconomicsizetotheaverageCRT-4country.TheaverageisclearlybroughtupbytheinclusionofRussiawhichisthreetimesaslargeasthesecondbiggestcountryintheregion.



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Political Risk

Figure 11showspoliticalriskintheregion.CountriesintheregionscorebetweenCRT-3andCRT-4onaveragewithparticularweaknessinfiscalpolicyefficiency.Sloveniascoresbetterthantherestoftheregionintermsofpoliticalrisk.


Figure 12illustratestotalpremiumsasapercentofGDP.Belarus,BosniaandHerzegovinaandKazakhstanhavethelowestratiointheregionwhileSloveniaandPolandhavethehighest.

Figure 11Political Risk Summary – Central Asia and Eastern Europe


0

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M onetary P o licy

F isca l P o licy





Lega l S ystem

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0%

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Source: A.M. Best


Latin America and CaribbeanThisregioncombinesLatinAmericaandtheCaribbeansub-regions.

Latin America

•Theentireregionisfeelingtheweightoftheglobaleconomicdeclineasrelianceonexportstodevelopedcountries–particularlytheUnitedStates–andrelianceoncommodityindustriesandtourismwillresultingrowthdecelerationsifnoteconomiccontractionsin2009.Weatheringthestormwilldependgreatlyonsoundgovernmentpoliciesandinstitutions.

•ForecastsforgrowthinallofLatinAmericaarebeingreviseddownward–inmanycasespredictingasharpregion-widecontraction.

•TheLatinAmericaninsuranceindustryisdominatedbyMexicoandBrazil,whorepresent63%ofpremiumswrittenintheregion.

Caribbean

•ThecountriesoftheCaribbeanvaryinculturalorigin,economicfoundationandpopulationaffluence.However,inallcases,theirlong-termgrowthandstabilityishighlydependentupontheirlargerregionalneighbors.

•AsmuchoftheCaribbeanreliesupontourismrevenuesfromnationalsofdevelopedcountries,particularlytheUnitedStates,economicgrowthissufferingin2009.

•TheCaribbeanfinancialservicessectorswillbeaffectedbythecurrentglobalfinancialcrisis.Theexactimpactisyettobedeterminedasthetrendofnationalizationsandconsolidationsinfinancecompaniesandthecollapsingofhedgefundscontinues.


Latin America and Caribbean

This region combines Latin America and the Caribbean sub-regions.

Latin America • The entire region is feeling the weight of the global economic decline as reliance

on exports to developed countries – particularly the United States – and reliance on commodity industries and tourism will result in growth decelerations if not economic contractions in 2009. Weathering the storm will depend greatly on sound government policies and institutions.

• Forecasts for growth in all of Latin America are being revised downward – in many cases predicting a sharp region-wide contraction.

• The Latin American insurance industry is dominated by Mexico and Brazil, who represent 63% of premiums written in the region.

Caribbean• The countries of the Caribbean vary in cultural origin, economic foundation and

population affluence. However, in all cases, their long-term growth and stability is highly dependent upon their larger regional neighbors.

• As much of the Caribbean relies upon tourism revenues from nationals of developed countries, particularly the United States, economic growth is suffering in 2009.

• The Caribbean financial services sectors will be affected by the current global financial crisis. The exact impact is yet to be determined as the trend of nationalizations and consolidations in finance companies and the collapsing of hedge funds continues.

Latin America and Caribbean Risk Category Very Low Low Moderate High Very High Economic 0 4 4 (5) 2 (1) 1Political 0 4 (6) 6 (4) 1 0Financial System 0 5 (6) 3 (2) 2 1

Economic Risk

Note that for the first time in the figures on GDP Per Capita and GDP the special cases in the Caribbean are included. This is because they make up a very large part of the region and are representative of the region. Figure 13 illustrates the average wealth of countries in this region. The wealthiest countries in the region include the Cayman Islands and the British Virgin Islands, while the least wealthy are the Dominican Republic and Jamaica.

Figure 13: GDP Per Capita


Figure 14: Gross Domestic Product (Billions, USD)

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Economic Risk

NotethatforthefirsttimeinthefiguresonGDPPerCapitaandGDPthespecialcasesintheCaribbeanareincluded.Thisisbecausetheymakeupaverylargepartoftheregionandarerepresentativeoftheregion. Figure 13illustratestheaveragewealthofcountriesinthisregion.ThewealthiestcountriesintheregionincludetheCaymanIslandsandtheBritishVirginIslands,whiletheleastwealthyaretheDominicanRepublicandJamaica.

Figure 14showstheaverageeconomicsizeofacountryinLatinAmericaandtheCaribbean.TheaverageissmallandsimilartoaCRT-5country,butthisactuallyunderstateshowsmallmostofthecountriesintheregionare.ManyoftheislandsoftheCaribbeanareamongthesmallestcountriesassignedCountryRiskTiersandtheregionalaverageisdrasticallyincreasedbytheinclusionofMexico.Nevertheless,thesesmalleconomiesarelargelyislandcountrieswithsmallpopulations,helpingtomaintainarelativelyhighGDPpercapita.



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Political Risk

Figure 15showsthatpoliticalriskscoresintheregionare,onaverage,betweenCRT-2andCRT-3.Barbados,theBritishVirginIslands,CaymanIslandsandtheBahamasdisplaythelowestlevelsofpoliticalrisk,whiletheDominicanRepublichasthehighestlevel.


Figure 16illustratestotalpremiumsasapercentofGDP.TheaveragefortheregionisbetweentheaverageforCRT-4andCRT-5.ThehighestpercentageintheregionincludestheBahamaswhiletheDominicanRepublicandMexicoareamongthelowest.

Figure 15Political Risk Summary – Latin America and Caribbean


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Middle East and Northern Africa

•TheMiddleEast&NorthAfricaregionincludesseveralwealthyoilproducingnationsandischaracterizedbyregionalinstabilityandperiodsofregionalviolence.

•Aftermorethanfiveyearsofrapidexpansion,drivenprimarilybyaboominoilprices,theoutlookfortheMiddleEast&NorthAfricaregionhasbecomemorepessimistic.

•WiththeWorldBankforecastingoilpricestoremainbelowtheirpeaklevelsfortheforeseeablefuture,theregionwillcontinuetofaceeconomicchallenges.

•Inadditiontofallingoilprices,theglobaleconomicslowdownhasimpactedtheregionthroughreducedtourismandtighteningcreditconditions.


Middle East and Northern Africa

• The Middle East & North Africa region includes several wealthy oil producing nations and is characterized by regional instability and periods of regional violence.

• After more than five years of rapid expansion, driven primarily by a boom in oil prices, the outlook for the Middle East & North Africa region has become more pessimistic.

• With the World Bank forecasting oil prices to remain below their peak levels for the foreseeable future, the region will continue to face economic challenges.

• In addition to falling oil prices, the global economic slowdown has impacted the region through reduced tourism and tightening credit conditions.

Middle East and Northern Africa Risk Category Very Low Low Moderate High Very High Economic 0 3 (4) 6 (5) 5 0Political 0 0 (1) 9 (8) 5 0Financial System 0 5 (7) 3 (1) 5 1

Economic Risk

Figure 17 illustrates the average wealth of countries in the region. The levels of wealth in the region vary widely from those in the rich oil producing states of the Gulf Cooperation Council (GCC) to the less wealthy countries of Northern Africa. The average GDP per capita for the GCC - Bahrain, Kuwait, Oman, Qatar, Saudi Arabia and the United Arab Emirates - is approximately USD 35,000, between the average for CRT-1 and CRT-2.



Figure 18 shows the average economic size of countries in the Northern Africa and Middle East region. The countries in this region are small, similar to the average for CRT-5. Turkey is the largest country (in terms of gross domestic product) in the region followed by Saudi Arabia. The smallest include Bahrain, Cyprus, Jordan and Lebanon.



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Economic Risk

Figure 17illustratestheaveragewealthofcountriesintheregion.ThelevelsofwealthintheregionvarywidelyfromthoseintherichoilproducingstatesoftheGulfCooperationCouncil(GCC)tothelesswealthycountriesofNorthernAfrica.TheaverageGDPpercapitafortheGCC-Bahrain,Kuwait,Oman,Qatar,SaudiArabiaandtheUnitedArabEmirates-isapproximatelyUSD35,000,betweentheaverageforCRT-1andCRT-2.

Figure 18showstheaverageeconomicsizeofcountriesintheNorthernAfricaandMiddleEastregion.Thecountriesinthisregionaresmall,similartotheaverageforCRT-5.Turkeyisthelargestcountry(intermsofgrossdomesticproduct)intheregionfollowedbySaudiArabia.ThesmallestincludeBahrain,Cyprus,JordanandLebanon.



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Political Risk

PoliticalriskisrelativelyhighfortheMiddleEastandNorthernAfricaregionwithallcountrieshavingatleastamoderateamountofpoliticalrisk.Regionalstabilityisthelargestchallenge.Egypt,Jordan,Morocco,TurkeyandLebanonallhavehighlevelsofpoliticalrisk.


Figure 20illustratestotalpremiumsasapercentofGDP.TheaveragetotalpremiumsasapercentofGDParelowintheregion,similartotheaverageforCRT-5.IsraelandCyprushavethehighestlevelwhileKuwait,SaudiArabiaandEgyptarethelowest.

Figure 19Political Risk Summary – Middle East and Northern Africa


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North America

•TheNorthAmericaregionisdominatedbytheUnitedStatesofAmericawhichaccountsforUSD14trillionofthetotalUSD16trillionineconomicactivity.

•In2007,theUShousingmarket,whichhadbeenadrivingforceoftheeconomy,ceaseditsprolongedupsurge.Simultaneously,severalmajorUScommercialbanks,investmentbanksandmortgagecompaniessufferedsignificantfinancialloss,primarilyrelatedtosubprimeorotherhighriskloans.TherippleeffectspreadthroughtheUSfinancialsystemanddevelopedintoaglobalfinancialcrisis.Thisfinancialturmoilledmostoftheworld’seconomiesintorecession.


Political Risk

Political risk is relatively high for the Middle East and Northern Africa region with all countries having at least a moderate amount of political risk. Regional stability is the largest challenge. Egypt, Jordan, Morocco, Turkey and Lebanon all have high levels of political risk.

Figure 19: Political Risk Summary – Middle East and Northern Africa Score 1 (best) to 5 (worst)

Source: A.M. Best


Figure 20 illustrates total premiums as a percent of GDP. The average total premiums as a percent of GDP are low in the region, similar to the average for CRT-5. Israel and Cyprus have the highest level while Kuwait, Saudi Arabia and Egypt are the lowest.

Figure 20: Total Premiums/Gross Domestic Product


North America

• The North America region is dominated by the United States of America which accounts for USD 14 trillion of the total USD 16 trillion in economic activity.

• In 2007, the US housing market, which had been a driving force of the economy, ceased its prolonged upsurge. Simultaneously, several major US commercial banks, investment banks and mortgage companies suffered significant financial loss, primarily related to subprime or other high risk loans. The ripple effect spread through the US financial system and developed into a global financial crisis. This financial turmoil led most of the world’s economies into recession.

North America Risk Category Very Low Low Moderate High Very High Economic 2 0 (1) 1 (0) 0 0Political 3 0 0 0 0Financial System 2 (3) 1 (0) 0 0 0

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EconomicRisk

Figure 21illustratestheaveragewealthofcountriesintheNorthAmericaregion.TheregionalaverageforNorthAmericaisanaverageoftheUnitedStatesandCanada,twocountrieswithhighlevelsofGDPpercapita.

Figure 22showstheaverageeconomicsizeofcountriesintheNorthAmericaregion(U.S.andCanada).ThesizeofthecountriesinthisregionfarexceedstheaveragesizeofanyoftheCountryRiskTiers.TheUnitedStatesisbyfarthelargestcountryintheworldintermsofGDPandCanadaisthe10thlargestcountryinoursample.



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Political Risk

Theregionscoreswellinpoliticalrisk.Allthreecountries–Bermuda,CanadaandtheUnitedStates–haveverylowlevelsofpoliticalrisk.


Figure 24illustratestotalpremiumsasapercentofGDP.Theregionalaverage(averageoftheU.S.andCanada)isonparwiththeCRT-1andCRT-2average.TheUnitedStatesalonerepresentsapproximately30%ofpremiumswrittenintheworld.

Figure 23Political Risk Summary – North America


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Sub-Saharan Africa

•TheregionofSub-SaharanAfricacontainsavastarrayofclimates,naturalresourcesandhistoricalandculturalfoundations.

•Theregionasawholeisplaguedwithviolence,crime,malnutritionandcorruption,withfewofthecountriesenjoyingeconomicprosperity.Insomecases,theregionishometosomeofthemosteconomically-challengedcountriesintheworld.

•TheinsuranceregulatoryenvironmentsthroughmostofSub-SaharanAfricaareinastageofdevelopment,workingtowardcompliancewithinternationalstandards.


Sub-Saharan Africa

• The region of Sub-Saharan Africa contains a vast array of climates, natural resources and historical and cultural foundations.

• The region as a whole is plagued with violence, crime, malnutrition and corruption, with few of the countries enjoying economic prosperity. In some cases, the region is home to some of the most economically-challenged countries in the world.

• The insurance regulatory environments through most of Sub-Saharan Africa are in a stage of development, working toward compliance with international standards.

Sub-Saharan Africa Risk Category Very Low Low Moderate High Very High Economic 0 0 1 2 2Political 0 0 2 2 1Financial System 0 1 1 0 3

Economic Risk

Figure 25 illustrates the average wealth of countries in the region. Sub-Saharan Africa includes some of the poorest countries that A.M. Best evaluates and the average GDP per capita is below the average of a CRT-5 country. The wealthiest countries in the region are South Africa and Mauritius while Ghana and Kenya are the poorest.



Figure 26 shows the average size of the economies in this region. As the graph shows countries in this region are on average very small, similar to the average for a CRT-5 country. The largest countries are South Africa and Nigeria while Mauritius is the smallest.



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Economic Risk

Figure 25illustratestheaveragewealthofcountriesintheregion.Sub-SaharanAfricaincludessomeofthepoorestcountriesthatA.M.BestevaluatesandtheaverageGDPpercapitaisbelowtheaverageofaCRT-5country.ThewealthiestcountriesintheregionareSouthAfricaandMauritiuswhileGhanaandKenyaarethepoorest.

Figure 26showstheaveragesizeoftheeconomiesinthisregion.Asthegraphshowscountriesinthisregionareonaverageverysmall,similartotheaverageforaCRT-5country.ThelargestcountriesareSouthAfricaandNigeriawhileMauritiusisthesmallest.



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Political Risk

Figure 27showsthattheSub-SaharanAfricaregionscoresrelativelypoorlyintermsofpoliticalrisk(onaveragebetweenCRT-4andCRT-5).Theregionperformsparticularlypoorlyintermsofregionalstability.AllcountrieshaveatleastmoderatelevelsofpoliticalriskandthepoliticalriskinNigeriaisveryhigh.


Figure 28illustratestotalpremiumsasapercentofGDP.SouthAfrica,whichhasthehighestpremiumswritteninAfrica,distortstheaverageofthisratiointheregion.SouthAfricahasaveryhighratioofpremiumstoGDP(over15%)whichinflatestheaveragethatalsocontainstheverylowratios(lessthan1%)inGhanaandNigeria.Thus,whiletheaveragefortheregionappearshighthiscanbemisleadinginthatitisnotrepresentativeforthemajorityofthecountriesintheregion.AllofAfricacompriseslessthan2%ofglobalpremiums.

Figure 27Political Risk Summary – Sub-Saharan Africa


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Western Europe

•WesternEuropeisahighlydevelopedandaffluentregion.TheEuropeanUnion(EU)isaneconomicandpoliticalunionof27countriesthataccountsfor30%ofworldgrossdomesticproduct(GDP).TheEUisfacilitatingasingleEuropeanmarketwithstandardizedregulatorysystemsandfreemovementofpeople,goods,servicesandcapital.

•Theeuro-zoneismadeupofthe16EUmembersthathaveadoptedtheeuroastheircurrency.

•Most,ifnotall,ofWesternEuropeisexperiencingasevereeconomicslowdownandmanycountriesare,orsoonwillbe,inanofficialrecession.WhiletheEuropeanCentralBankhascutinterestratestospurdemand,economicgrowthintheregionhasstagnated.


Western Europe Risk Category Very Low Low Moderate High Very High Economic 9 (11) 9 (7) 1 0 0Political 15 4 0 0 0Financial System 15 (16) 4 (3) 0 0 0

Economic Risk

Figure 29 illustrates the average wealth of countries in the region. As the figure shows the countries in Western Europe have very high levels of GDP per capita, on average exceeding the CRT-1 average. While all the countries in this region have high levels of wealth, Luxembourg and Norway are the wealthiest.



Figure 30 illustrates the average size of the economies in the region. On average the countries of Western Europe are large; however there is a wide variance in size across the region. The very large economies of Germany, France, United Kingdom, Spain and Italy bring up the average significantly.



Political Risk

While overall political risk scores in the region are low (15 of the 19 countries have very low political risk while the other 4 have low political risk), there is some weakness in terms of labor flexibility and fiscal policy, as illustrated in figure 31.

Figure 31: Political Risk Summary – Western Europe Score 1 (best) to 5 (worst)

Source: A.M. Best


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Economic Risk

Figure 29illustratestheaveragewealthofcountriesintheregion.AsthefigureshowsthecountriesinWesternEuropehaveveryhighlevelsofGDPpercapita,onaverageexceedingtheCRT-1average.Whileallthecountriesinthisregionhavehighlevelsofwealth,LuxembourgandNorwayarethewealthiest.

Figure 30illustratestheaveragesizeoftheeconomiesintheregion.OnaveragethecountriesofWesternEuropearelarge;howeverthereisawidevarianceinsizeacrosstheregion.TheverylargeeconomiesofGermany,France,UnitedKingdom,SpainandItalybringuptheaveragesignificantly.



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Political Risk

Whileoverallpoliticalriskscoresintheregionarelow(15ofthe19countrieshaveverylowpoliticalriskwhiletheother4havelowpoliticalrisk),thereissomeweaknessintermsoflaborflexibilityandfiscalpolicy,asillustratedinfigure 31.


Figure 32illustratestotalpremiumsasapercentofGDP.Thesemarketsaremature.Moreover,thesecountriesarethebaseofseveraloftheworld’sleadingreinsurers.WhilenearlyallthecountriesintheregionhaverelativelyhighratiosofpremiumstoGDP,Luxembourg,theUnitedKingdomandIrelandareamongthehighestwhileNorwayandSpainareamongthelowest.

Figure 31Political Risk Summary – Western Europe


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ConclusionThisreportexaminedthecurrentpopulationofcountriesassignedCountryRiskTiersbyA.M.Bestandidentifiedthecharacteristicsthataretypicaltocountriesinagiventier(andregion).ThoughtheannualcycleforreviewingcountryriskendsinAugust,atwhichtimeanupdatedtierslistwillbereleased,alltierassignmentsaresubjecttochangeatanytime.Moreinformationisavailableat:

http://www3.ambest.com/ratings/cr/crisk.aspx?l=1&Menu=Country+Risk.


Country Risk Global Report

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