New York — The insurance industry’s journey through rough financial waters is likely to continue in the year ahead. That was the take of Kurt Karl, chief economist at SwissRe’s New York-based economic research and consulting unit, as he presented at the company’s mid-year economic forum.

Karl said the U.S. economy had weakened considerably and there was an 80% chance of a recession. Karl said that the mix of soft consumer spending, record energy prices and lingering problems in the housing and credit markets do not bode well for either insurers or the economy as a whole. However, Karl said the combination of easing by the Federal Reserve, a forthcoming fiscal stimulus package and strong exports should have a palliative effect, and the recession should be moderate. Karl said he foresaw two scenarios—each of which he assigned only a 10% chance of happening—that could result in a severe recession. The first involved a spike in inflation, prompting the Fed to “step on the brakes” to avoid runaway inflation. The second scenario involved a worsening credit crisis prolonging and deepening a moderate recession.   Karl’s colleague, Thomas Holzheu, SVP and deputy head of the economic research and consulting unit, assayed what implications these macroeconomic events hold for P&C insurers. Holzheu said that while the industry’s exposure to the subprime crisis was manageable, insurers could face higher costs of capital, as leveraged capital is withdrawing from the insurance space. A more direct effect of the crisis on insurers would be as providers of D&O and E&O policies.

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