Insurers and reinsurers are turning to high-grade government bonds as a response to economic turmoil in Europe, but as carriers look to reduce their exposure to sovereign default, they may be opening themselves up to interest and inflation rate risk down the road, a recent report says.  

Insurance industry portfolio yields have fallen steadily from 2007 to 2012, hitting their highest mark at five percent in Q2 2007, but falling to less than half of that in Q2 2012. Yet, despite these low yields, Guy Carpenter says in a mid-year review that insurers are more conservatively invested now than at any time in recent memory, as heightened risk and uncertainty in some Eurozone countries has led to a "flight to quality" among insurer and reinsurers.

"Eurozone fears are now focused on Spain and italy since they are structurally important to the stability of the single currency," GC says in its report. "Carriers have reacted to this threat with a flight to safety in investment portfolios and a movement into high-grade government and corporate bonds." These higher-grade investments include Swiss, U.S., German, Japanese and British government bonds