Impacts of the Quantitative Easing on the European Insurance Industry

Project Start:03/2016
Researchers:Monica Billio, Petr Jakubik, Nicola Mano, Loriana Pelizzon, Matteo Sottocornola
Area: Systemic Risk Lab
Funded by:LOEWE

Topic and Objectives

As a reaction to the financial crisis, the European Central Bank (ECB) and the Federal Reserve (Fed) follow an expansionary monetary policy. Since 2013 the ECB is enforcing a series of conventional and unconventional monetary interventions, like Quantitative Easing (QE), which lead to low inflation, ultra-low yields, and extremely low interest rates.

This environment is becoming a severe threat for the insurance industry in terms of solvency and sustainability of their business models. The lack of sufficiently remunerable rated assets on the market substantially reduce the capability for (re)insurers to match by a return and duration perspective the outstanding portfolio of guaranteed policies underwritten in high-yield years. ECB QE tend to exacerbate the scarcity of valuable assets on the market. 

The project is looking at the impact of the actions taken by the ECB on the market returns of (re)insurers. Additionally, the characteristics of (re)insurers that drive the sensitivities of the companies to changes in interest rates are analyzed. The project deeply investigates both the effects of the low yields on (re)insurers and the effects of the monetary policy interventions on the markets. For what the impacts of central bank interventions are concerned a vast literature scrutinizes the role of the monetary policy announcements on asset pricing with room to be filled in the area of unconventional interventions in near-zero interest rate environments.

To assess the impact of conventional and unconventional monetary policy strategies on the insurance industry, a twofold approach is used. First, the impact on the stock of performances of 166 (re)insurers from the QE program is analyzed by constructing an event study around the announcement date. The scope is enlarged by looking at the monetary policy surprise effects on the same sample of (re)insurers over a timeframe of 12 years, also extending the analysis to the Credit Default Swaps (CDS) market. In the second part, the characteristics of (re)insurers that determine sensitivity to monetary policy actions are identified by building a set of balance sheet-based indices.

Key Findings

  • QE has a moderate negative effect on the insurance industry.
  • The outcomes of the event study are strongly dependent on the observation period.
  • Monetary policy actions, when producing statistically significant results, have more limited results on (re)insurers than on other companies, particularly with respect to the ECB.
  • Long-term nature of business serves as rationale to explain the reduced impact on (re)insurers.
  • Potential negative impacts of reduced interest rates on long-term obligations that characterize the business overcome the short-term benefits deriving from the market-to-market valuation of the assets.
  • During ECB monetary policy days when an instantaneous reduction of the interest rate is observed, the detrimental effect on the stock return is associated with a negative impact on CDS spreads.
  • In line with the economic expectation, size and exposure to fixed income assets seem to drive the sensitivity of (re)insurers to monetary policy interventions.
  • Against the initial hypothesis based on the liability-driven nature of the insurance business, none of the liability-based indices provide statistically significant results.

Related Working Papers

204Loriana Pelizzon, Matteo SottocornolaThe Impact of Monetary Policy Interventions on the Insurance Industry2018 Systemic Risk Lab Event study, monetary policy surprise, unconventional monetary policy, conventional monetary policy, insurance industry