UK insurers raise bond demand as US insurers pull back
A Bank of England working paper finds that UK monetary tightening raises UK life insurers' net purchases of UK corporate bonds while cutting demand from US insurers holding the same bonds. The study examines transactions from 2018 to 2022.
Opposite reactions to the same rate shock
The paper examines monthly transactions in UK corporate bonds by UK and US life insurers between January 2018 and December 2022.
Following a 1 percentage point increase in the 10-year gilt yield, UK insurers raised net purchases of GBP-denominated bonds by about 0.5 percentage points of outstanding amounts after two months, rising to roughly 2.5 percentage points after 14 months.
Over the same period, US insurers cut net purchases of the same bonds, denominated in USD, by about 1 percentage point of outstanding amounts after one year.
A 1 percentage point rise in the 10-year US Treasury yield produced a similar pattern: UK insurers' GBP purchases rose about 1.2 percentage points after one year, while US insurers' USD purchases fell about 0.5 percentage points.
Where Solvency II meets home currency bias
UK life insurers held about GBP 130 billion in UK corporate bonds in 2019, compared with GBP 33 billion held by US insurers.
Holdings are strongly segmented by currency: 94 percent of UK insurers' positions are GBP-denominated, while 98 percent of US insurers' UK corporate bond holdings are in USD.
The authors attribute the divergent responses to regulation: Solvency II's Matching Adjustment rewards UK insurers for taking on long-duration GBP corporate debt as yields rise, while US insurers face reach-for-yield incentives and policyholder-surrender pressures instead.
Regulatory quirks, not textbook logic
Ignoring foreign bondholders can mislead transmission estimates, since US insurers' selling partly offsets UK insurers' buying.
The explanation leans heavily on Solvency II's Matching Adjustment, a UK-specific quirk unlikely to generalize elsewhere.
Policymakers should weigh this offsetting channel alongside domestic duration mechanics.