Italian government debt and sovereign credit risk: an empirical exploration and some thoughts about consequences for European insurers

The current sovereign debt crisis in the Euro-Zone is a cause of major concern for European insurers. Especially the fears about increased sovereign credit risk in Italy??leading to higher risk premia??may result in major difficulties because many insurance companies have invested in Italian government bonds. Therefore, this paper examines the relationship between German and Italian government bond yields using techniques of cointegration analysis. Furthermore, implications for insurance companies and regulators (focussing on Solvency II) are discussed.