You DO need insurance to drive a vehicle in Panama.
In fact, if you rent a car in Panama, you will REALLY pay for insurance! You'll find that if you price a rental car online - it sure seems cheap, but when you get to the rental car desk, it gets more than twice as expensive. Panama will make you get expensive insurance on your rental car, so don't be surprised (or shocked) when you see the bill.
If, however, you have your own car, it is quite cheap to insure it, so don't fret. If you are spending a great deal of time in Panama, like I try to, you may be better off buying a cheap car and leaving it there. Pay a couple hundred bucks a year and save the crazy rental car insurance costs.