European insurers face mounting solvency pressure, with equity market declines and rising sovereign bond yields posing the largest risks to capital positions despite stronger fixed income portfolios, according to Moody’s.
Stress scenarios show that a 25% fall in equity markets could reduce solvency ratios by up to -10%-p, while a 50bps increase in government bond spreads could lower ratios by up to -8%-p. A 25% rise in equities could increase ratios by up to +7%-p, while a 50bps rise in interest rates could add up to +4%-p.
A broad increase in sovereign yields would reduce bond valuations across portfolios and weaken capital positions. More localised movements in individual sovereign spreads would have a smaller effect.
Research published by the Bank of England shows that solvency risk arises when asset values fall relative to liabilities and that systemic risk can increase during periods of financial stress, with correlations across institutions rising and amplifying market shocks.
Exposure to domestic sovereign debt differs across Europe, reinforcing the link between government bond markets and insurer balance sheets. Italian insurers hold about 37% of investments in domestic sovereign bonds, compared with 23% in Spain, 17% in France, 11% in Belgium, 7% in Germany, and 5% in the Netherlands.
Higher interest rates since 2022 have led insurers to reallocate toward higher-rated assets. The yield on 10-year Aaa-rated German government bonds rose from 0.01% in January 2022 to 2.84% in January 2026, supporting increased investment in highly rated sovereign debt and A-rated corporate bonds, while exposure to Baa-rated instruments declined.
Sovereign bonds accounted for around 34% of total investments in 2024, while corporate bonds remained at about 32%. The improvement in credit quality has also been supported by upgrades among large sovereign issuers, including Spain’s move from Baa to A in September 2025.
Further improvement in fixed income portfolio quality is not expected given the current outlook on European sovereigns.
European insurers continue to hold capital above required levels. S&P Global Ratings expects capital surplus for insurers it rates to reach about €150 billion in 2026, supported by capital management, lower risk appetite, and market conditions.
At the same time, the sector faces external risks including geopolitical tensions, trade conflicts, and muted economic growth, which could affect asset valuations and growth prospects.
Insurers are expected to increase exposure to illiquid assets, particularly private credit, which account for around 20% of total investments. These portfolios remain concentrated in real estate and mortgage loans.
Within this segment, insurers may increase allocations through direct lending and securitized structures, while maintaining a focus on assets that align with liability profiles. Industry research indicates that private and structured credit strategies, including infrastructure debt and collateralized loan obligations, are being used to access additional spread and diversify portfolios.
In Europe, private credit exposure remains lower than in the US, reflecting regulatory capital treatment and market structure, although UK insurers hold relatively higher allocations than EU peers, according to S&P Global Ratings.
Changes to Solvency II due to take effect in January 2027 will lower capital charges for securitised assets, particularly senior tranches. For example, capital charges for certain highly rated senior positions will move closer to those applied to corporate bonds.
However, capital requirements for non-STS securitisations will remain higher than for comparable corporate debt in many cases, particularly for longer-duration assets. This limits their attractiveness for some insurers, especially life companies with long-dated liabilities.
The changes are expected to have a limited effect on overall allocations because many large insurers rely on internal models rather than the standard formula used to calculate capital requirements.
Exposure to real estate has decreased in recent years, accounting for about 7% of investments in 2024 compared with 8% in 2022, partly due to lower valuations.
Regulatory changes will reduce the relative advantage of real estate compared with other asset classes, although it will continue to provide diversification benefits.
Changes in asset allocation since 2022 have been driven primarily by interest rate movements rather than shifts in investment strategy. In 2024, cash and equivalents accounted for about 5% of investments, equities about 13%, structured products about 4%, mortgages about 5%, and real estate about 7%.
Moody’s said the main vulnerabilities for the sector remain tied to market movements, particularly equity valuations and sovereign bond yields, which continue to influence insurers’ capital positions and investment decisions.
