MEXICO CITY: U.S. based insurance sector rating agency AM Best has revised its market segment outlook on Panama’s insurance industry to negative from stable, citing the significant challenges the country and industry are facing amid the COVID-19 pandemic.

In a Best’s Market Segment Report, AM Best states that the following are the reasons for the revised outlook: an expected decline in GDP in 2020; a continued slowdown in the construction sector, along with a decline in transport and cargo industries; and an overall economic contraction.

Additionally, commercial trade volume on the Panama Canal, the government’s primary source of revenues, has declined owing to the global recession, which is pressuring the country’s public finances.

Two offsetting factors are the USD 515 million disbursement recently approved by the International Monetary Fund that will provide the government with the necessary funding to address the pandemic, and the recent $2.5 billion issuance in sovereign bonds, which provides the country with further financial flexibility.

Mandatory isolation measures have resulted in declined economic activity, which has led to a decrease in property/casualty claims. The insurance industry’s profitability, reinforced by stable returns owing to historically conservative investment strategies, could be pressured by a significant exposure to fixed-income securities, given that the COVID-19 pandemic is exacerbating the impact of the low interest-rate environment.

The current volatility in the equity markets constitutes a significant challenge for underwriters to enhance their investment income, while maintaining investment strategies appropriate to their asset-liability management.

Disruption in manufacturing and supply chains, in conjunction with the decline in overall economic activity, has compounded the industry’s credit risk exposure. Still, insurance companies have opted to provide flexibility on premiums through deferred payment arrangements.

AM Best also notes that the industry’s enterprise risk management capabilities will be tested by the pandemic