Eurozone collapse remains top threat for insurance industry – Swiss Re chief economist

Policy mistakes could still kill economic recovery, Insurance Risk Europe conference hears

European Union flags

The eurozone crisis remains the major threat for insurers, more so than a sharp rise in inflation or a hard landing of China's economy, according to Kurt Karl, chief economist and managing director at Swiss Re.

Speaking at the Insurance Risk Europe conference in London, Karl warned that while the global economy is on a positive track, policy errors could derail it. "Policy mistakes are still possible. Slipping back into recession is still possible," he said.

Karl warned of the potentially damaging impact of slow-paced structural reforms within the eurozone and cited fears of a Spanish default, which would increase the chance of a collapse of the monetary union.

"It is positive news that Angela Merkel was re-elected, but Europe is facing a muddling-through scenario. The EU monetary union will most likely survive, but with very slow growth, because they won't solve the banking issue quickly and won't resolve the Spanish issue quickly," he said.

The risk of a downturn in the US economy, resulting from political bickering, and a hard landing of the Chinese economy lagged behind developments in Europe as risk scenarios that would harm insurers.

Inflation and interest rate developments were other indicators insurers were watching closely because of loose monetary policy.

Karl forecast that interest rates would increase slowly after 2015, with the US Federal Reserve being the first to raise policy rates, followed by the Bank of England and the European Central Bank (ECB).

US rates would rise to 1.65% by the end of 2015, and to 3% by the end of 2016, he predicted. Interest rates in the UK would rise faster to 5% by the end of 2016 due to higher growth and inflation.

Karl said central banks could take too long to address rising inflation, but he talked down that possibility, noting that they could easily control the risk of rising prices through selling assets in their portfolios.

It was also unlikely that the ECB would allow inflation to spike reducing the burden of sovereign debt.

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