Car rental deposit €730 for 24h in a small car?

You need to check the details of the rental agreement, and especially the damage waivers. Likely the waiver is a policy (you mention it as insurance )which you can reclaim if you have an accident, and the company have blocked the excess off as they will charge you this if you have an accident. The way to avoid this is to make sure the deal is WITHOUT excess, that means they will not charge you in the case of an accident.

--Update

And in answer to the original question, the excess amount in the hold is usually based on the rental class (so I've seen a luxury class require 2000 eur+ on 2 separate credit cards against different banks), the figure likely represents at least the amount of the car rental company's excess on their insurance, so they make you take all the risk

There are two reasons for the deposit.

The first reason is that the deposit covers the difference repairing the damage and the cost of claiming for the damage on the insurance.

To reduce premiums, Insurance policies normally have an excess amount meaning they will not pay out on the first €x of any claim. Claim for €500 with a €200 excess and they will pay €300. You can pay hire higher premiums to reduce the excess.

In this case, if you return a car with a scratch, it could cost maybe €200 to repaint it as new. And another €300 when you include time and effort involved in getting it fixed and lost earnings from the car not being available hire out to others. Claiming on the insurance will get the hire company that €200 back (minus the excess), but cost time and effort and out-of-pocket expenses to make the claim. All of which comes out of your deposit.

The second reason is that even though you can almost always reduce or even eliminate the deposit by paying a higher insurance premium, the idea that you know you will lose up to €730 for even a small amount of damage, you are likely to be more careful while driving it.

Not fully sure, but I believe the deposit is calculated based on the value of the car. And in Europe those small cars are priced similarly to much larger cars in the US.
While that car might seem small to you, for Europe it's a mid size family car similar to what you'd expect a Ford Taurus to be in the US.

Retail price new for one is around 20.000 Euro (give or take a few thousand depending on country, options, and specific version).

730 Euro deposit for a car like that doesn't sound bad at all, in fact it sounds pretty normal.