Credit rating agency Fitch Ratings thinks that El Salvador’s insurance firms will be on thin ice when the country adopts Bitcoin.
Fitch, one of the “Big 3” credit rating agencies, argues that exposure to the crypto asset’s volatile price action and operating risks could be a credit negative for El Salvador’s insurance companies.
“El Salvador’s recent legislation establishing Bitcoin as a legal tender will likely be a credit negative for local insurance companies with exposure to the newly established currency due to higher FX [foreign exchange] and earnings volatility risk as well as additional regulatory and operating risk considerations…
Insurers that hold Bitcoin on their balance sheets for extended periods will be acutely exposed to its price volatility, increasing asset risk, which is a credit negative.”
The New York-based giant argues that the country’s insurance firms are already exposed to risky assets, so additional exposure to Bitcoin could compound that risk.
“Fitch generally views earnings derived from speculative activities or risky exposures such as Bitcoin as a credit negative, since gains could quickly reverse, creating a volatile earnings stream. The country’s insurance sector is already exposed to low credit quality securities, mainly sovereign bonds (B-/Rating Outlook Negative) so additional holdings of high-risk assets will only compound this risk.”
Fitch thinks El Salvadorian insurance firms will be forced to develop significantly more infrastructure to be able to handle incorporating Bitcoin in their business models.
“Fitch anticipates that the adoption of Bitcoin will require insurance companies to absorb new IT (information technology), operating, and administrative expenses. 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.”
Featured Image: Shutterstock/Craig Hastings