Dutch Insurers’ Reaching for Yield in the Bond Market

Abstract

This study examines ‘reaching for yield’ behaviour of Dutch insurance companies in the corporate and sovereign bond market during the period after the introduction of Solvency II regulation. Reaching for yield can be defined as the tendency of insurers to engage in riskier assets in order to optimize yields within regulatory constraints. This study contributes to the existing literature by specifically examining ‘reaching for yield’ behaviour of insurers in the context of Solvency II regulation. I provide evidence for ‘reaching for yield’ behaviour of Dutch insurers in the corporate and sovereign bond market by using confidential security-level transaction data for 24 Dutch insurers. Related to that, I rule out the probability that ‘reaching for yield’ behaviour may be due to the superior ability of insurers to pick under-priced investments. Additionally, I define the risks that Dutch insurers engage in to optimize yields and find that Dutch insurers tend to shift towards bonds that carry significant liquidity risk. Finally, I refute the financial stability concerns regarding ‘reaching for yield’ behaviour by providing evidence that Dutch insurers act countercyclical by increasingly purchasing ‘high-yield’ bonds during the Covid-19 pandemic.