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Swiss Re Says Debt Crisis May Derail Economic Rebound

Swiss Reinsurance Co., the world’s second-biggest reinsurer, said the economic recovery may be “derailed” by a deterioration in Europe’s debt crisis.

“There are still concerns as to whether Greece and Ireland can cope with the problems they face,” Kurt Karl, Swiss Re’s chief U.S. economist, said in an e-mailed statement today. “Instability continues in several important real estate markets including the U.S., Ireland and Spain.”

That instability has the potential to “stress” the banking industry, according to the Zurich-based reinsurer, which is presenting its global economic outlook today.

European Union finance ministers yesterday ruled out an increase in the 750 billion-euro ($1 trillion) crisis fund, a week after handing Ireland an 85 billion-euro lifeline. The finance chiefs are counting on European Central Bank bond purchases to calm debt-spooked markets and voiced confidence that Spain and Portugal will tame their budget deficits. Greece won a 110 billion-euro EU-IMF rescue in May, leading the EU to create the three-year facility that was first tapped by Ireland.

The reinsurer expects the global economy to show “moderate growth” through 2011 with premiums in non-life insurance growing 3 percent after inflation in developed economies and as much as 8 percent in emerging markets.

Insurers’ profitability will stay “under pressure” in 2011 as low interest rates and new industry regulations damp investment returns.

‘Key Problem’

“A key problem is that regulatory factors will force insurers into low-yielding government bonds, increasing the risk that they miss out on a market upturn,” Swiss Re said.

Insurers including Swiss Life Holding AG and Zurich Financial Services AG have said they will cut reliance on investment income and increase income from underwriting in a bid to reduce earnings volatility. Low rates are squeezing margins after life insurers offered policyholders rate guarantees before the beginning of the credit crisis.

Swiss Re expects a correction of non-life premium rates in 2012. “Current rates are not sustainable even when interest rates start to correct,” said Chief Economist Thomas Hess.

The life and health insurance industry will grow 4.1 percent in 2011, down from 4.3 percent this year, as “exceptional growth” in emerging markets slows, Hess said on a conference call form Zurich today.

Non-life reinsurance will grow “moderately,” while annual growth of about 10 percent for life reinsurance in emerging markets will offset stagnation in developed countries.

“Developed and emerging markets have parted ways on growth, with emerging markets booming while developed economies are growing at a more modest pace,” said Karl. “That is set to continue in 2011 and 2012.”

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