UPDATE 3-Zurich Insurance takes $550 mln profit hit in Germany
* Had not set aside enough to cover long-term liabilities
* Writes off some deferred costs of buying new business
* Engages external experts to validate remedial action
* Shares down 4.3 percent, underperform sector (Adds comments from spokesman, analyst, updates shares)
By Katharina Bart and Martin de Sa'Pinto
ZURICH, Oct 17 (Reuters) - Switzerland's Zurich Insurance Group will take a $550 million hit to third-quarter pretax profit after a review showed its German arm had not set aside enough money to cover potential claims made years after policies have expired.
The insurer said on Wednesday the hit also covered writing off some deferred costs of buying new business, without elaborating.
Many insurance claims, such as cases involving long-term illness or medical negligence, are not made until years after a policy has expired, and insurers routinely put money aside to cover these so-called "long tail" liabilities.
"This is clearly a negative for Zurich in the near term financially and reputationally as the reserving issues of Zurich have long been considered a thing of the past," said Espirito Santo analyst Joy Ferneyhough, referring to the firm's previous efforts to strengthen its provisions for future liabilities.
Zurich said the provision shortfall stemmed mainly from policies taken out by high earners including doctors, engineers and architects.
Spokesman Riccardo Moretto said the problem was that, in the past, data quality in Germany had not been as detailed as needed.
"Assumptions can change during the long tail period which necessitate changes in the reserves. This was a purely German issue. Data quality did not allow us to do accurate enough claims reservations," Moretto said.
"We have reviewed our claims handling processes and the way we handle client provisions, and we are confident we have addressed all the main issues on long tail claims."
The profit hit comes in a year of almost no major payouts for, for example, natural catastrophes, which means overall profitability and Zurich's ability to pay a dividend isn't jeopardized, Kepler Capital Markets analyst Fabrizio Croce said.
Nevertheless, it shines a light on rivals such as Germany's Allianz, Europe's biggest insurer, which might also have to set aside extra cash to cover unforeseen claims, Espirito Santo's Ferneyhough said.
"More broadly this will likely raise questions in the sector about German long tail business, with Allianz the obvious initial read through," she wrote in a note.
Allianz wasn't immediately available for comment.
At 1135 GMT, Zurich shares were down 3.6 percent at 235.5 Swiss francs, underperforming a flat Stoxx Europe insurers index . Allianz shares were up 0.8 percent.
Zurich said the adjustments would be included in its nine-months results to Sept. 30 and estimated the after tax impact was $390 million.
It added that its other businesses continued to perform as expected and it was progressing well towards its strategic targets. Full earnings for the quarter are due on Nov. 15.
Vontobel analyst Stefan Schuermann downgraded his rating on Zurich stock to "hold" from "buy" and trimmed his price target to 250 Swiss francs from 260 francs on the "surprising" charge. Bank Sarasin also downgraded the shares to "neutral" from "buy". (Reporting by Katharina Bart and Martin de Sa'Pinto; Editing by David Holmes and Mark Potter)