European Central Bank research finds euro area insurers’ home-biased sovereign bond holdings and flood-related bond sales can spill over into domestic yields

The European Central Bank published research based on ECB Discussion Paper 28 on euro area insurers’ asset allocation and their links to sovereign bond markets. It finds insurers’ balance sheets have become less liquid and more sensitive to market conditions, while portfolios remain heavily concentrated in sovereign bonds, particularly domestic ones, and insurers tend to sell these assets to meet large claims after natural disasters. Life insurers have increased allocations to alternative and less liquid assets such as private debt, real estate, infrastructure and private equity, with alternative investments accounting for nearly one-quarter of their portfolios. A strong home bias persists in sovereign and corporate bond holdings, and the analysis estimates that the Eurosystem’s quantitative easing amplified domestic sovereign exposures for insurers with stronger home bias, even as these bonds were being purchased under the Public Sector Purchase Programme and the Pandemic Emergency Purchase Programme; holdings of “other investments” also rose more for insurers with greater QE exposure. Using flood data from 2013 to 2023, the study finds property and casualty insurers primarily fund large claims by selling government bonds, especially short-term securities, over several quarters, with smaller sales of corporate bonds; in countries with stronger home bias, floods are followed by temporary increases in domestic government bond yields. The paper argues that deeper market integration through the capital markets union would support more diversified bond portfolios and could mitigate these amplification effects.