h a AMB Country Risk Report August 18, 2015 Our Insight, Your Advantage. India Country Risk Tier • The Country Risk Tier (CRT) reflects A.M. Best’s assessment of three categories of risk: Economic, Political and Financial System Risk. CRT-4 • India, a CRT-4 country, has a moderate level of economic risk and a high level of political and financial system risk. The International Monetary Fund is predicting that beginning in 2015 India’s gross domestic product (GDP) growth will outpace China’s and make it the world’s fastest growing major economy. GDP growth for India is expected to be 7.5% in 2015, driven by public spending in infrastructure and improving exports as the U.S. economy recovers. Over the next few years, growth is expected to range between 7.5 - 7.8%. Economic Risk Moderate Low High Very Low • The countries pictured below represent a great deal of the world’s economic potential, containing the top two most populous countries (China #1 and India #2) in the world. Very High Political Risk Iceland Finland Greenland Moderate Sweden Norway Low High Estonia Isle of Man Ireland Very Low Lithuania Belarus United Kingdom Netherlands Guernsey Liechtenstein Czech Republic Austria Switzerland France Ukraine Slovakia Luxembourg Jersey Bosnia & Serbia Herzegovina Bulgaria Montenegro Armenia Albania Portugal Gibraltar Tunisia Malta Cyprus Syria Lebanon Moderate North Korea Tajikistan South Korea China Afghanistan Iraq Israel Japan Iran Jordan Low Kuwait High Algeria Libya Mauritania Egypt Saudi Arabia Bhutan Bangladesh U.A.E. Myanmar India Taiwan Northern Mariana Islands Hong Kong Laos Wake Island Macau Mali Chad Niger Sudan Very High Eritrea Thailand Yemen Vietnam Philippines Cambodia Benin Nigeria Ethiopia Equatorial Guinea Sao Tome & Principe Somalia Sri Lanka Central Africa Republic Togo Brunei Gabon Congo Palau Malaysia Singapore Cameroon Uganda Kenya Sumatra Rwanda Dem. Republic Burundi of Congo Seychelles Tanzania azil Malawi Nauru New Guinea Indonesia Namibia Market Outlooks Mauritius Madagascar Botswana Solomon Islands Reunion Australia New Caledonia Swaziland Norfolk Island Lesotho South Africa Tuvalu Vanuatu Mozambique For information on companies followed Papua New Guinea Coral Sea Islands Comoros Zambia Zimbabwe Federated States of Micronesia Borneo East Timor Angola Marshall Islan Guam Dijbouti Burkina Faso Ghana Guinea Sierra Cote d'Ivoire Leone Liberia Nepal Qatar Oman Senegal Guinea-Bissau Pakistan Bahrain Western Sahara Very Low Gambia Uzbekistan Turkmenistan (Occupied by Morocco) Cape Verde s nd la Is Kyrgyzstan Azerbaijan Turkey Greece Monaco Morocco Georgia Macedonia Spain ril Ku Russia Financial System Risk Italy Mongolia Romania Croatia Andorra Canary Islands Kazakhstan Republic of Moldova Hungary Slovenia San Marino Sakhalin Very High Poland Germany Belgium Azores Russia Russia Latvia Denmark CRT 1 2 3 4 5 Copyright © 2015 by A.M. Best Company, Inc. All rights reserved. No part of this report may be reproduced, stored in a retrieval system or transmitted in any form or by any means; electronic, mechanical, photocopying, recording or otherwise. 1 New Zealand F AMB Country Risk Report India Regional Summary: South Central Asia Vital Statistics 2014 • The region of South Central Asia comprises the countries south of the Himalayans. • The outlook for the region over the next year indicates a modest increase in growth, largely driven by a stronger export market. A majority of the region’s economic output comes from the Indian economy. • Risks facing the region include vulnerabilities relating to global economic conditions including the effects of monetary policy tightening in the U.S. and the potential for stagnation in Europe. Domestic developments, such as political turmoil and non-sustainable fiscal policies, could undermine stability and investor confidence. • As labor costs increase in other Asian markets, South Central Asia has the opportunity to increase its manufacturing activity. However, the region will need to boost competitiveness by improving infrastructure, reducing bureaucracy and limiting corruption. Nominal GDP Population GDP Per Capita Real GDP Growth Inflation Rate Premiums Written (Life) Premiums Written (Non-Life) Premiums Growth (2013 - 2014) USD bn mil USD % % USD mil USD mil % 2049.50 1259.7 1,627 7.2 6.0 55,299 14,590 7.2 Regional Comparison Country Risk Tier CRT-4 CRT-3 CRT-4 CRT-4 CRT-4 CRT-3 India China Indonesia Kazakhstan Russia Thailand Source: IMF, Axco, Swiss Re and A.M. Best Economic Growth Economic Risk: Moderate • India has a diverse economy that is led by two main industries, the globally competitive knowledge-driven service sector and a large agricultural sector, which employs over 60% of the population. 12 Real GDP CPI Inflation 10 8 • The lower oil price environment has been a positive for India as the country has to import approximately 70% of its oil requirement. Lower prices will likely boost domestic demand, and a lower fuel subsidy bill will benefit India’s external and fiscal accounts. • The country has high levels of poverty with the average GDP per capita at approximately 1,600 USD in 2014. % 6 4 2 0 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020 Source: IMF World Economic Outlook and A.M. Best 2 AMB Country Risk Report India Political Risk: High Political Risk Summary • Prime Minister Modi, of the ruling BJP party, took office in June of 2014.The BJP party has a strong mandate in parliament winning 282 out of 545 seats.The mandate should help end party paralysis, allowing important reforms in education, healthcare and infrastructure to pass. Score 1 (best) to 5 (worst) India World Average International Transactions Policy 5 4 Legal System Monetary Policy 3 2 1 Regional Stability • The government has recently prioritized liberalization and approved increased limits on foreign direct investment from 26% ownership to 49% ownership in certain industries, including telecommunications and insurance. Fiscal Policy 0 Social Stability Business Environment Government Stability • The country’s most immediate external threat is with Pakistan and the dispute over Kashmir.The country also faces potential domestic threats from terrorism, increasing levels of violent crimes and periodic social unrest as a result of income inequality. Labor Flexibility Source: A.M. Best • Specific challenges facing the government include a high level of corruption, pervasive bureaucracy, a lack of transparency, and the need to improve public safety and reduce levels of poverty. GDP Per Capita and Population for Selected Countries Financial System Risk: High 1600 14,000 GDP Per Capita Population 1400 12,000 1200 • The insurance industry is regulated by the Insurance Regulatory and Development Authority (IRDA). 10,000 1000 USD Millions 8,000 800 6,000 600 4,000 400 2,000 0 200 India China Source: IMF and A.M. Best Indonesia Kazakhstan Russia Thailand 0 • India’s financial system is well capitalized and supervised, however, deteriorating corporate financial positions and worsening bank asset quality could weigh on financial sector soundness. • While gradually improving, further improvements are needed to enhance bank supervision and monitoring. Further strengthening measures needed include addressing concentration risks, increasing capital buffers and strengthening the insolvency framework. 3 AMB Country Risk Report India GUIDE TO BEST’S COUnTry rISk TIErS A.M. Best defines country risk as the risk that country-specific factors could adversely affect the claims-paying ability of an insurer. Country risk is evaluated and factored into all Best’s Credit Ratings. Countries are placed into one of five tiers, ranging from “CRT-1” (Country Risk Tier 1), denoting a stable environment with the least amount of risk, to “CRT-5” (Country Risk Tier 5) for countries that pose the most risk and, therefore, the greatest challenge to an insurer’s financial stability, strength and performance. A.M. Best’s Country Risk Tiers are not credit ratings and are not directly comparable to a sovereign debt rating, which evaluates the ability and willingness of a government to service its debt obligations. Country risk Tiers Country risk Tier Definition CRT-1 Predictable and transparent legal environment, legal system and business infrastructure; sophisticated financial system regulation with deep capital markets; mature insurance industry framework. CRT-2 Predictable and transparent legal environment, legal system and business infrastructure; sufficient financial system regulation; mature insurance industry framework. CRT-3 Developing legal environment, legal system and business environment with developing capital markets; developing insurance regulatory structure. CRT-4 Relatively unpredictable and nontransparent political, legal and business environment with underdeveloped capital markets; partially to fully inadequate regulatory structure. CRT-5 Unpredictable and opaque political, legal and business environment with limited or nonexistent capital markets; low human development and social instability; nascent insurance industry. Country risk reports A.M. Best Country Risk Reports are designed to provide a brief, high-level explanation of some of the key factors that determine a country’s Country Risk Tier assignment. It is not intended to summarize A.M. Best’s opinion on any particular insurance market or the prospects for that market. Categories of risk Country Risk Reports provide scores for three categories of risk for each country. These scores are (1) Very Low; (2) Low; (3) Moderate; (4) High and (5) Very High. Category of risk Definition Economic Risk The likelihood that fundamental weaknesses in a country’s economy will cause adverse developments for an insurer. A.M. Best’s assessment of economic risk evaluates the state of the domestic economy, government finances and international transactions, as well as prospects for growth and stability. Political Risk The likelihood that government or bureaucratic inefficiencies, societal tensions, inadequate legal system or international tensions will cause adverse developments for an insurer. Political risk comprises the stability of the government and society, the effectiveness of international diplomatic relationships, the reliability and integrity of the legal system and of the business infrastructure, the efficiency of the government bureaucracy, and the appropriateness and effectiveness of the government’s economic policies. Financial System Risk Financial system risk (which includes both insurance and non-insurance financial system risk) is the risk that financial volatility may erupt due to inadequate reporting standards, weak banking system or asset markets, and/or poor regulatory structure. In addition, it includes an evaluation of whether the insurance industry’s level of development and public awareness, transparent and effective regulation and reporting standards, and sophisticated regulatory body will contribute to a volatile financial system and compromise the ability of an insurer to pay claims. Political risk Summary To provide additional detail on the political risk in a given domicile the Country Risk Reports include the Political Risk Summary. The Political Risk Summary is a radar chart that displays scores for nine different aspects of political risk scored on a scale of one to five with one being the least amount of risk and five being the highest amount of risk. Category Definition International Transactions Policy Measures the effectiveness of the exchange rate regime and currency management. Monetary Policy Measures the ability of a country to effectively implement monetary policy. Fiscal Policy Measures the ability of a country to effectively implement fiscal policy. Business Environment Measures the overall quality of the business environment and ease of doing business. Labor Flexibility Measures the flexibility of the labor market, including the company’s ability to hire and fire employees. Government Stability Measures the degree of stability in a government. Social Stability Measures the degree of social stability, including human development and political rights. Regional Stability Measures the degree of stability in the region. Legal System Measures the transparency and level of corruption in the legal system. Country risk Tier Disclosure A Country Risk Tier (CRT) is not a credit rating, rather it represents a component of A.M. Best’s Credit Rating Methodology that is applied to all insurers. A CRT is not a recommendation to purchase, hold or terminate any security, insurance policy, contract or any other financial obligation issued by a government, an insurer or other rated issuer, nor does it address the suitability of any particular policy, contract or other financial obligation for a specific purpose or purchaser. Copyright © 2015 by A.M. Best Company, Inc. Version 091714 Copyright © 2015 by A.M. Best Company, Inc. All rights reserved. No part of this report may be reproduced, stored in a retrieval system or transmitted in any form or by any means; electronic, mechanical, photocopying, recording or otherwise. 4