European reinsurers including Munich Re and Swiss Reinsurance Co., the world’s biggest, tumbled after an 8.9 magnitude earthquake struck the coast of Japan, unleashing a tsunami that engulfed towns north of Tokyo.

The quake, the world’s strongest in more than six years, struck offshore near the east coast of Honshu, 373 kilometers northeast of Tokyo. The subsequent 10 meter-high tsunami swept across buildings and farmland as far as 1.5 kilometers inland.

“This looks like an expensive incident, but with that in mind, both architects and the insurance industry plan for major events in the region,” said Christian Muschick, a Frankfurt- based analyst with Silvia Quandt & Cie. AG “Tokyo seems not to be severely hit.”

The disaster, which killed at least 18 people and left many more missing, caused the Bloomberg Europe 500 Insurance Index to fall 2.4 percent to 102.3 points, the largest drop since July. Scor SE, Hannover Re, Swiss Re and Munich Re, Europe’s biggest reinsurers, led the declines. The four reinsurers, which provide cover to primary insurers, said it’s too early to provide loss estimates for themselves or the industry.

The earthquake and tsunami caused damage across “broad areas” of northern Japan, according to Newark, Calif.-based Risk Management Solutions Inc. State broadcaster NHK Television showed footage of waves sweeping away buildings and vehicles. Airports were closed and bullet train services suspended. More than 4 million homes are without power, Tokyo Electric Power Co. said.

European Losses

A Japanese earthquake is one of catastrophe insurers’ four “peak zones” along with a San Francisco earthquake, U.S. hurricanes and Gulf of Mexico hurricanes, so costs will probably be spread equally among the biggest reinsurers, according Joy Ferneyhough, a London-based insurance analyst at Banco Espirito Santo de Investimento SA.

“My initial sense is this isn’t going to be a huge industry loss,” she said. “This will be something smaller and manageable, which will impact 2011 earnings, but not ‘the big one’ that we’ve been waiting for to turn pricing.”

The cost of protecting insurance companies’ bonds rose, with credit-default swaps protecting the senior debt of Swiss Re climbing 8 basis points to 124, the highest since Jan. 14, and contracts on Munich Re increasing 6 basis points to 74, according to CMA. A basis point is 0.01 percentage point.

The Markit iTraxx Japan index of default swaps tied to the nation’s government and corporate bonds, rose 4 basis points to 102, the biggest jump since November, according to Markit Group Ltd.

Reinsurance swaps

Swaps linked to Hannover Re’s senior debt rose 10.5 basis points to 126, the highest since June, and its junior swaps increased 10 basis points to 161. Contracts on the lower-ranking debt of ING Groep NV’s insurance holding company, ING Verzekeringen, jumped 17 basis points to 285 and Swiss Re’s increased 11 basis points to 151.

Reinsurers are already nursing losses from the flooding in Queensland, Australia at the end of last year and the New Zealand earthquake that struck Christchurch on Feb. 22. Claims from the New Zealand temblor may be between $6 billion and $12 billion, according to Swiss Re. The company’s own claims burden is likely to be $800 million, it said.

Munich Re, the world’s biggest reinsurer, yesterday said its full-year profit target of about 2.4 billion euros ($3.3 billion) “will only remain achievable, if random losses in the further course of the year remain below expectations.”

The most costly earthquake to hit Japan struck Kobe, Osaka and Kyoto in 1995, costing insurers about $3 billion, not taking inflation into account. The quake caused $100 billion in total economic losses, much higher than the sum covered by insurers as infrastructure such as motorways and bridges were rarely insured due to the high cost of insurance in an earthquake prone area.