Insurance companies in El Salvador face an array of added risks due to the country’s decision to adopt Bitcoin as legal tender, starting next month, says Fitch Ratings.
In a new report, the rating agency said that the move to establish Bitcoin as legal tender in El Salvador will likely be a negative for insurance companies operating in the country, “due to higher FX and earnings volatility risk as well as additional regulatory and operating risk considerations.”
As of Sept. 7, all businesses will have to accept Bitcoin as legal tender — unless they don’t have access to the technology needed to process the transactions.
While Fitch does not expect insurers to make claim or benefit payments in the cryptocurrency, or to offer policies denominated in Bitcoin, the rating agency did say that usage of Bitcoin by policyholders represents added risk.
“Insurers will likely convert bitcoin into [U.S. dollars] as quickly as possible to limit exchange risks, if policyholders decide to use it to pay premiums,” Fitch said, noting that insurers that hold Bitcoin on their balance sheets will face increased volatility and asset risk.
Yet, it’s not clear whether the regulatory framework will allow insurers to immediately convert Bitcoin premiums into dollars, Fitch said.
Regulation is also needed to define how Bitcoin should be accounted for on financial statements, “and if it will be considered eligible to back policyholder reserves,” the report said.
The report noted that the government has indicated that it will issue regulations on Bitcoin adoption by Sept. 7, but that such a timeline “leaves insurance companies with very little time to adapt to its requirements, creating additional risk for the industry,” Fitch said.
Fitch also expects that insurance companies will incur 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 the security of their systems from cyber risks and fraud and investing in advisory for the board of directors and managers, as well as training of personnel who will directly manage transactions,” the report said.
Fitch added that it views Bitcoin’s lack of transparency as an issue, and that it anticipates treating Bitcoin as a “risky asset” in its credit ratings.