International reinsurers had a limited exposure to the Feb. 27 earthquake in central Chile that generated upwards of $8 billion in estimated insured losses.

While a significant part of South America is vulnerable to earthquakes, these areas generally are less heavily insured than Chile (see story, page 14), experts say.

The magnitude 8.8 quake centered off the coast of Maule, Chile, was the fifth-largest earthquake since 1900, according to the U.S. Geological Service. An estimated 75% to 90% of insured quake losses were ceded through reinsurance, but the losses fell within the anticipated range of many international reinsurers, observers say.

Quake models always require some tweaking after a catastrophe, but the Chilean models were adequate and have not required major revisions, say observers, who note that reinsurers often buy multiple catastrophe models from vendors and a few develop their own as well.

While rates on catastrophe policies, many of which renewed midyear, increased in Chile as a result of the quake, the increases essentially were confined within the country's borders. Furthermore, capacity that entered the market after the quake put a damper on the rate hikes that were introduced in Chile itself, observers say.

Although more than 500 people died in the quake, Chile's strict building codes are credited with limiting the damage compared with the much milder 7.0 January quake in Haiti that devastated Port-au-Prince and killed more than 200,000. There was relatively little insured coverage of the Haiti quake, observers say.

Chile has “very strong building codes,” said Jason Howard, London-based CEO of Willis Re International & Specialty, a unit of Willis Group Holdings P.L.C. “They're rigorously monitored and, as result of that, buildings withstood the quake reasonably well,” he said.

The magnitude of the quake in Chile means a major earthquake is unlikely in that particular region in the near future, experts say. Even though Mexico, the western coast of South America and the Caribbean remain vulnerable to quakes, there is generally little earthquake insurance coverage in those markets.

Estimated insured losses due to the temblor in Chile vary widely. Oakland, Calif.-based EQECAT Inc. estimated insured losses ranged from $3 billion to $8 billion and economic damages ranged from $15 to $30 billion. The loss represents 15% to 40% of the estimated insured limits for earthquake coverage, according to the risk modeler.

This year's quake was the third major Chilean earthquake in recent years; the others were in 1985 and 1960, the strongest earthquake in the world since 1900 with a magnitude of 9.5, according to the USGS.

The Chilean quake is expected to be the second-costliest in insured losses in the past 30 years, after the Northridge, Calif., earthquake in 1994, according to Swiss Reinsurance Co., which estimated a market loss of $4 billion to $7 billion in Chile, somewhat lower than other estimates. Observers said one factor limiting losses was that the country's capital city, Santiago, was largely spared.

Franklin Santarelli, senior director with Fitch Ratings Ltd. in New York, said the Chilean losses were significant, but “the truth is that this catastrophe, compared to other catastrophes all over the world, is not that enormous in size.”

Bryon G. Ehrhart, CEO of Aon Benfield Analytics, a unit of Aon Corp. in Chicago, said the top five categories of catastrophe risk are U.S. wind, U.S. quake, European wind, Japanese quake and Japanese typhoon. Latin America “just doesn't figure at all,” he said.

However, Taoufik Gharib, director at Standard & Poor's Ratings Services in New York, said when the Chilean loses are combined with this year's other catastrophe losses, reinsurers have already exhausted more than half of their catastrophe budgets for the year.

Furthermore, reinsurers' second-quarter results indicate that the Chilean loss reduced reinsurers' earnings by about one-quarter, he said. The losses, though, were “within their risk tolerance, so there were no surprises there,” Mr. Gharib said.

Reinsurers were “adequately and appropriately exposed, according to what they have been doing for the last 10 years” in Chile, said Amador Torrealba, business developer for London-based reinsurance intermediary BMS Group Ltd.

Despite the size of the event, “almost no Chilean insurers went through their catastrophe covers,” which is “a really remarkable outcome compared to what occurred in, say, Hurricane Katrina in the U.S., where many insurers went through their reinsurance covers,” said Mr. Ehrhart.

Munich Reinsurance Co. reported about $1 billion in losses, but they were in line with expectations and “more or less reflected Munich Re's market share,” said Michael Spranger, earthquake consultant at Munich-based Munich Re.

Observers say the catastrophe models worked relatively well, although any catastrophe provides “an opportunity to evaluate” your modeling, said Rick Thomas, head of catastrophe underwriting in Zurich for Pembroke, Bermuda-based PartnerRe Ltd., which reported $334 million in net losses from the combined impact of the Chile earthquake and Windstorm Xynthia in Europe.

“Basically, we have learned new things about how structures behave in Chile,” which “has changed in the last decade because construction practices have varied from what they used to be,” said Guillermo E. Franco, principal engineer at Boston-based modeling firm AIR Worldwide Corp., who said his firm's model performed well.

Reinsurers have increased their catastrophe rates in Chile as much as 80%, say observers, but increased capacity has moderated the hikes.

Reinsurers were not able to raise rates “as much as they wanted to” because of the soft market, said BMS' Mr. Torrealba. “When something major happens, new reinsurers come in with more capacity,” he said. “They're trying to compete because they expect to write business with higher rates.”

Jorge Edwards, Santiago, Chile-based managing director for reinsurance intermediary Cooper Gay (Holdings) Ltd., said, “we saw that the capacity kind of dried up, and then it became very expensive,” immediately after the earthquake. “But we've seen other reinsurers coming in” since then, he said.

Mr. Ehrhart said, “I don't know I would say a lot more capacity has come in.”