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What's Behind Country Risk Ratings?

COUNTRY RISK RATINGS have been heavily used by international companies for years. In the era of globalization, the ratings are used as the basis for travel policies, insurance premiums, calculation of hardship allowances, or simply to gain context as to how the risks in one nation stack up against those of another. While the use of these ratings is broadly consistent, the way they are determined by risk management companies is not.

Annapolis, Maryland-based travel intelligence firm iJET, for example, polled its top clients to determine what would be the most sought-after factors to include in its country risk rating system. iJET wanted a distinctive guide that was comprehensive and reliable, says Sarah Slenker, a senior security analyst who was instrumental in its development. By letting clients help to shape the criteria, the company knew the system would be both unique and useful.

The results of the polling led iJet to select six categories for its ratings: crime, civil unrest, kidnapping, security services, geopolitics, and terrorism. It then ranks risk levels in each category on a scale of 1 to 5, with 1 being the lowest level of danger and 5 the highest.

The categories are fleshed out based on information gathered through iJET’s standard intelligence collection from roughly 200 stringers worldwide and 10,000 opensource outlets. Some 28 regional analysts pull together the data to rate about 190 countries. The ratings change with the news: if a country’s status alters, clients are notified immediately. Customers can access risk data online at all hours.

London-based Control Risks also uses a five-tier rating system, judging risk levels as insignificant, low, medium, high, and extreme. Its country risk forecasts cover 130 nations worldwide, and its CityBrief service extends forecasts to 310 urban centers. Its findings are classified under political risk and security risk.

“Applying rigid definitions to countries is the most important part of the process,” says Global Issues Manager James Smithers. “The most important bases are a very clear set of definitions, so we know we’re talking about the same thing whether we’re in Western Europe or the jungles of West Africa,” he says. Clients also want risks put in context, he adds.

Nineteen regional analysts collate information and assign the ratings, backed by a team of editors who check facts and provide quality control. Africa—where Smithers himself used to set ratings—has four analysts covering the continent: three in the sub-Saharan area and one for North Africa. The risk guide, available online, is constantly updated because the ratings are always changing.

SOS International sets itself apart from the other risk management companies by rating not only political and security situations in countries but also health risks. Chief Operating Officer Tim Daniel says that in addition to the obvious health threats inherent to some nations—such as malaria or dengue fever in tropical climes—they rate the quality of medical care available and the ease with which a foreigner could access it. Quality is also judged according to any hassles involved in a medical evacuation.

SOS uses 40 physicians around the globe to rate more than 200 countries according to their health systems on the basis of 1 to 5, with 5 being the worst. An editorial board standardizes ratings.

Besides its medical surveys, SOS covers 219 countries with risk ratings, in addition to roughly 200 cities. The current rating pool of 18 analysts is soon to be boosted to 35. They take into account five areas of threat to build a rating: terrorism, violent crime, conflict, civil unrest, and political instability. The firm then goes a layer deeper, using what it calls “modifiers” to round out its rating. The additional categories are economic conditions, government control, corruption, and infrastructure.

Risk ratings do have their limitations. “A country risk rating is useful as an indicator for companies as to the type of risk management they should dedicate to a location, and how they should educate travelers,” says Dave Cameron, vice president of SOS’s Americas security services. “They are not to be used to open a joint venture.” That requires more thorough due diligence.