Local insurance firms in El Salvador are poised to face credit headwinds linked to the nation’s embrace of bitcoin as an official currency, Fitch Ratings cautioned on Monday. The rating agency underscored heightened earnings and foreign exchange volatility as key factors, given insurers’ exposure to this volatile cryptocurrency.
Legislative Backing and Implementation Timeline
- On June 9, the El Salvador legislature endorsed the Bitcoin Law, paving the way for the country to officially recognize bitcoin as legal tender starting September 7.
- Fitch highlighted that adopting bitcoin introduces a range of “extra regulatory and operational uncertainties,” especially since global regulators have yet to finalize practical frameworks for the currency’s integration.
Operational Realities for Insurers
The agency emphasized that it doesn’t anticipate widespread insurer usage of bitcoin for settling claims, disbursing benefits, or issuing policies denominated in the cryptocurrency.
“The principal risks tied to bitcoin hinge on its adoption rate by policyholders,” Fitch noted. “Should insured parties opt to pay premiums in bitcoin, insurers are expected to promptly convert these payments into US dollars to mitigate currency risk.”
Current Credit Landscape and Future Concerns
At present, El Salvador’s insurance market carries exposure to low-grade credit instruments, predominantly sovereign bonds rated B- with a Negative Outlook.
Introducing higher concentrations of risky assets linked to bitcoin will only exacerbate existing vulnerabilities, Fitch warned.
Brief Data Overview
According to the latest figures, El Salvador’s insurance sector accounts for roughly 2.5% of GDP but has seen a steady increase in sovereign bond holdings year-on-year. These bonds represent over 60% of insurers’ total investment portfolios, reflecting entrenched risks if the government’s credit profile weakens.