The European Central Bank has published a discussion paper analysing how euro area insurers allocate assets and how their portfolio choices can transmit shocks into financial markets. The paper argues that insurers’ greater use of alternative and less liquid assets since the low interest rate period up to 2022, combined with persistent home bias in sovereign bond holdings, has made balance sheets more sensitive to market conditions and can create spillovers to sovereign debt markets. On monetary policy transmission, the analysis estimates that when the Eurosystem purchases 1% of the bonds outstanding that appear in an insurer’s portfolio, traditional life insurers rebalance about 0.5% of assets into “other investments” such as mortgages, loans, real estate and other less liquid instruments. In countries where insurers exhibit strong home bias, asset purchases are also associated with an increase in sovereign bond portfolio shares of around 0.25 percentage points. On climate-related liquidity shocks, major flood events are estimated to lead non-life insurers to sell about 8% of their government bond holdings on average, with disposals concentrated in short-term bonds, and the paper links this to a peak increase of roughly 5 bps in three-month sovereign yields in high home-bias countries. The paper points to advancing the Capital Markets Union as a route to greater bond portfolio diversification and cross-country risk sharing, potentially reducing feedback effects between insurance-sector liquidity needs and sovereign funding conditions.
European Central Bank 2025-12-02
European Central Bank publishes research on euro area insurers’ home bias, QE-driven risk taking and disaster-related sovereign bond sales
The European Central Bank's discussion paper examines euro area insurers' asset allocation and its market impact, noting increased sensitivity from alternative assets and home bias in sovereign bonds. Eurosystem bond purchases lead life insurers to rebalance portfolios, while climate shocks prompt non-life insurers to sell government bonds, affecting yields. The paper suggests advancing the Capital Markets Union to enhance bond diversification and mitigate feedback effects between insurance liquidity needs and sovereign funding.