Insurance companies are subject to restrictions on negligent risk-taking behaviour. This study aims to identify the causal effect of the macroprudential regulation, Solvency II, on investment decisions of Dutch insurance companies and specifically how this is reflected in the quantity/quality of mortgage lending. In response to the financial crisis in 2008, supervisors passed strict
requirements, in order to induce a change in risk management as well as to prevent further riskexposure and underfunding. We use a differences-in-differences regression analysis estimating the
causal effect of the regulatory framework, by exploiting the fact that underfunded institutions, those with a solvency ratio below the sample median, are more likely to be constrained by the
regulation and thus incentivized to use risk-shifting towards low-risk investments, such as government bonds and residential mortgages. Our results suggest that the financial crisis induced
underfunded insurance companies to increase their mortgage investment by 182%. We find that around the introduction of Solvency II there was no significant increase in mortgage underwriting
by affected insurers. The largest increase, however, took place before, due to a possible mix of transparent announcements by policymakers, forward-looking insurance companies reallocating
their portfolio, and banks anticipating the risk of higher capital requirements. These anticipations of low-capitalized insurers led to an increase of around 31 million Euros per year in their residential mortgage portfolio. At the same time, insurance companies that are part of financial conglomerates also increased their mortgage undertakings by more than 20 million Euros, while awaiting Basel III.5. Thus, higher capital requirements in both macroprudential regulations incentivized riskshifting towards residential mortgages that, in fact, served as a tool to immunize their portfolio.

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