In Brief
- It’s not clear whether the regulatory framework will allow insurers to convert Bitcoin premium into USD immediately.
- The use of crypto is likely to increase balance sheet, regulatory and operating risk in El Salvador.
El Salvador’s decision to accept bitcoin as legal money would likely be credit negative for local Insurance companies. Insurers of El Salvador may poses risk due to exposure to the price volatility of newly established currency.
According to a press release, El Salvador accepting bitcoin as a legal currency carries added regulatory and operational risks.
Bitcoin is set to become legal tender in the country on September 7, and exchange-rate volatility remains a risk factor for the sovereign. All businesses will have to accept bitcoin as legal tender unless they don’t access to the technology needed to process the transaction.
The dangers of adopting bitcoin are mainly determined by how widely it is accepted by policyholders. “If policyholders want to pay premium in bitcoin, insurers will likely convert bitcoin into USD as quickly as possible to limit exchange risks,” according to Fitch.
Yet it’s not clear whether the regulatory framework will allow insurers to immediately convert Bitcoin premium into USD, says the report.
“Insurance that hold bitcoin their balance sheet for extended periods will be acutely exposed to its price volatility, increasing asset risk, which is credit negative,” the firm’s analysts wrote.
Regulation is also needed to define how cryptocurrency should be accounted for on financial statements, “and if it will be considered eligible to back policyholder reserves,” the report said.
Also Read: Bank of America Report Sees Benefits in the El Salvador Bitcoin Adoption
Fintech warns Insurers of EL Salvador
The insurance sector in El Salvador is exposed to low credit quality securities, mainly sovereign bonds (B-/Rating Outlook Negative). Additional holdings of high-risk assets will only compound this risk, Fitch said.
FItch also expects the insurance companies to absorb new IT, operating, and administrative expenses to adopt Bitcoin as legal tender. “ These likely will include a need to enhance internal protocols to accept payments, reinforcing security of their system from cyber risks and fraud and investing in advisory for board of directors and managers,” according to the report.
