Occasional Research Paper - Insurers as shock absorbers in the mutual fund sector - 2025/2

Focus

How do insurance companies influence the stability of mutual funds when these face severe net outflows? Insurance companies are significant investors in mutual funds and are widely perceived as liquidity providers and contrarian traders. Mutual funds, especially those invested in illiquid underlying assets (e.g., corporate bonds) are often seen as fragile and prone to liquidity crises. This paper investigates the investment behavior of European insurance companies in mutual funds, particularly during periods when funds face significant net outflows, and examines their role in stabilizing the market.

Methodology

The study utilizes Solvency II data from the European Insurance and Occupational Pensions Authority (EIOPA), detailing insurers’ portfolio holdings on a security-by-security basis. This data is matched with fund-level information from Lipper/Eikon, including net inflows, returns, and total net assets. The analysis employs panel regressions with time-varying insurer and fund fixed effects to assess whether insurers purchase fund shares when the funds experience elevated net outflows and to evaluate how insurers’ financial health influences these investment decisions.

Key Findings

Contrarian Trading Behavior: Insurance companies tend to purchase fund shares when other investors are divesting, especially during periods of severe net outflows. This contrarian behavior is more significant for fixed income funds that face large net outflows, with insurers purchasing a substantial portion of them.

Affiliation Impact: Insurers act as contrarian traders particularly to funds affiliated with them, purchasing significantly more shares of these funds compared to unaffiliated ones. 

Solvency II Requirements: The contrarian trading of insurers varies as a function of their solvency ratios. Insurers with lower solvency ratios purchase fewer shares of funds that experience elevated net outflows, indicating that their financial health affects their ability to act as contrarian traders.

Fund Resilience: Funds with insurer investments exhibit lower flow-to-performance sensitivity and reduced volatility of flows, suggesting that insurers’ support enhances mutual funds’ resilience.

Conclusion

The investment patterns uncovered in the research paper provide interesting insights for the stability of the financial system. Firstly, by acting as contrarian traders, particularly to affiliated funds, insurers help mitigate the impact of potential investor runs and enhance market resilience. Secondly, they suggest that the contrarian trading of insurers may prove more modest in times of severe systemic stress when insurers’ own financial health comes under pressure. The loss of this stabilising force could leave mutual funds more vulnerable to panic-induced withdrawals and exacerbate financial turbulences.