The insurance model would not address the inflation threat, but it would buy time to resolve the bloc's problems, Arnoldussen said.

“You still have to work on the other issues, but at least you get the chance to work on the other issues,” he said.

Europe would eventually need to move to a fiscal union, with a common budgetary policy with effective sanctions, he said.

“This ultimately would be a sustainable solution for the problem, and we need sustainable solutions,” Arnoldussen said.

The debt crisis had created a raft of uncertainties for the insurance industry, which was now firmly focused on capital preservation, he said.

In light of this, Munich Re was not contemplating a return to share buybacks in the short term, he said.

STABLE REINSURANCE PRICES

Turning to industry developments, Arnoldussen said prices were stabilizing for the risk cover that reinsurers sell to their insurance company clients, with prices rising in areas hit by earthquakes and tornadoes.

Munich Re expects the pricing trend seen so far this year to continue, as it begins tough negotiations with its insurance company clients to renew insurance contracts for 2012, he said.

“We are seeing a general stabilization in prices, coupled with hardening markets in a number of segments,” he said.

Natural catastrophes such as the earthquakes in Japan and New Zealand earlier this year, as well as tornadoes in the United States, make 2011 likely to be the costliest year ever for the insurance industry.

Munich Re has pushed through average price rises of up to 50 percent in Australia and New Zealand, and 10 percent for the United States and Latin America, so far this year, it said.

Prices in the rest of its portfolio remained stable, it said.

Reinsurers like Munich Re, Swiss Re and Hannover Re help insurance companies shoulder the burden of large claims in exchange for part of their premiums, but industry observers say reinsurers may not be able to hold prices stable despite the large claims.

“Brokers will be mindful that the sector remains generally well capitalized,” said Martyn Street, an analyst at credit rating agency Fitch.

“With the U.S. windstorm season so far proving to be relatively benign, capacity remains well supported outside of lines and geographies directly affected by losses,” Street said in a research note last week, adding that reinsurers might not be able to maintain as strong a pricing power as they would like. (Reporting by Jonathan Gould; Editing by Will Waterman)