The European Insurance and Occupational Pensions Authority (EIOPA) has launched a new publication series, bringing together the expertise of in-house specialists with that of external researchers, academics and analysts. The newly conceived “Occasional Research Papers” aim to inform policy and regulatory discussions on key topics affecting the European (re)insurance and occupational pension sectors.
The inaugural paper of this series – with experts from the Harvard Business School, the University of Chicago’s Booth School of Business, the Charles University of Prague, the Bank for International Settlements and EIOPA – explores the global asset allocation decisions of European insurers and banks in fixed-income portfolios.
The paper brings novel insights to a previously little-researched area by jointly considering the investment behaviours of both banks and insurers, and examining for the first time the relationship between their asset allocation in domestic and international markets.
The research reveals important new international portfolio frictions – barriers or challenges investors face when attempting to diversify their portfolios across borders – that cannot be explained by traditional frictions like home country or home currency biases.
The first key finding is that the characteristics of banks’ and insurers’ domestic investments in fixed-income securities are largely mirrored in their international portfolios, rather than being offset. In countries where insurers and banks have a higher share of corporate bonds in their domestic fixed-income portfolios, their foreign investments also tend to feature corporate bonds heavily, instead of rebalancing towards government securities. We label this phenomenon the ‘domestic projection bias’.
The second important bias identified concerns the behaviour of subsidiaries. The research paper reveals that multinational groups do not use their foreign subsidiaries to optimize their global portfolio. Instead, subsidiaries tend to have portfolios very similar to those of their peers in the local market. We call this the ‘going native bias’.
The overall findings suggest that well-developed insurance and pension fund markets are instrumental in promoting active corporate bond markets. However, the two newly identified international portfolio frictions – the domestic projection bias and the going native bias – also indicate that efforts to deepen and integrate European capital markets will face challenges.
Read the Research Paper on International Portfolio Frictions
Background
EIOPA values cooperation with all stakeholders in Europe’s (re)insurance and occupational pensions sectors. To leverage the insights and expertise of external academics and analysts working in these fields, EIOPA established its External Research Platform in 2020.
The goal of this platform is to enable external researchers to analyse Solvency II and IORP II reporting data submitted to EIOPA in a secure environment, while also benefiting from the expertise of in-house specialists.
EIOPA’s Occasional Research Papers showcase the results of research proposals that were submitted to the platform and selected for further investigation.