Inflation may be a bigger risk for insurers than tsunamis or Europe’s sovereign debt crisis because claims costs could climb faster than the value of the firms’ investments, said Martin Sullivan, deputy chairman of broker Willis Group Holdings Plc.

“Inflation could well be the monster under the bed,” Sullivan said today at an Insurance Insider conference in London, billed as his first public speech since he left as chief executive officer of American International Group Inc. Rising prices “can be more deadly to an insurer’s economic health than defaults, earthquakes, winter storms, or tsunamis.”

Consumer prices in the U.S., China, Germany and the U.K. have advanced the most since 2008 this year, spurred by higher energy costs and government efforts to stimulate economies. Inflation adds to insurers’ costs for rebuilding property, treating injuries and paying legal claims that can emerge years after policies are sold, a problem that can be magnified by low interest rates, said Sullivan.

The yield on 10-year Treasuries is about 2 percent, compared with a U.S. inflation rate of 3.6 percent. The so- called real yield, or difference between the two, is negative 1.6 percentage points, the lowest since 2008. U.S. insurers hold more than $3 trillion in bonds to help back policies.

“Of all the issues out there, inflation could be the one that comes to surprise a lot of companies,” said Sullivan. “In a zero interest-rate environment, reinsurers face two options: they either accept a continuously weakening balance sheet or they raise their rates.” The Federal Reserve has kept benchmark interest rates in a target range of zero to 0.25 percent.

Reinsurance Rates

Property and casualty insurers and reinsurers are unlikely to raise rates this year as the industry has substantial reserves even after the earthquake and tsunami in Japan and U.S. tornadoes fueled worst first-half for insured losses on record, Dominic Christian, co-chief executive officer of Aon Benfield Group Ltd. said at the conference today.

Aon Benfield, a unit of No. 1 broker Aon Corp., said today that global reinsurer capital was $445 billion at the end of June, an increase of about 1 percent from March 31.

London-based Willis, the No. 3 insurance broker, hired Sullivan last year to help the company sign up more of the world’s biggest firms as clients. New York-based AIG has had three CEOs since Sullivan’s departure.

Sullivan started at AIG, once the world’s biggest insurer, as a 17-year-old clerk and became CEO in 2005. He was ousted in 2008 as the company posted losses on subprime mortgage bets that led to a government rescue package that swelled to $182.3 billion.