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Munich Re to spend $1.1 billion on primary insurance revamp

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(Bloomberg) – Munich Re, the world’s second-biggest reinsurer, plans to spend 1 billion euros ($1.1 billion) by 2020 restructuring operations at its loss-making primary insurance unit in Germany, Ergo Group AG.

The plan for Ergo’s German operations includes cutting 1,835 jobs, or about 13 percent of the Dusseldorf-based company’s workforce in Germany, according to a statement on Wednesday.

About a quarter of the industry’s almost one million jobs may be lost in Europe over the next decade, including positions in policy issuing and claims management, according to McKinsey & Co. European insurers have become vulnerable to unpredictable levels of claims as premiums stagnate and investment income dries up amid record-low interest rates.

See also: Swiss Re names new reinsurance chief as profit beats estimates

At Ergo, most of the new money will be used to modernize computer systems. The company’s sales force and administration will also be streamlined, generating total net savings of 280 million euros by 2020, Ergo’s Chief Executive Officer Markus Riess said at a press conference in Dusseldorf. The changes will help put Ergo in a position to contribute 500 million euros a year to Munich Re’s earnings from 2021 at the latest, he said.

Riess, 49, was hired by Munich Re CEO Nikolaus von Bomhard last year with the task of improving profitability at Ergo. The company, which contributes about one third of Munich Re’s premium income, reported a net loss of 227 million euros for last year as it wrote down the value of its German life insurance business.

German life insurers are being challenged by low interest rates because their offerings have traditionally featured guaranteed returns that were as high as 4 percent for policies sold in the second half of the 1990s. As a life-insurance contract can run for 30 years or more, it’s difficult to meet these obligations with German 10-year government bonds paying less than 0.2 percent. The average interest guarantee of German life insurers was 2.59 percent last year, according to Cologne-based insurance ratings firm Assekurata.

Ergo will spend 432 million euros on the digitalization and modernization of its IT systems. It had to correct life insurance payments that were too high or too low in more than 350,000 cases last year because of faulty technology.

A further 379 million euros will be invested “to make operations leaner and more efficient” with a focus on the sales force, Riess said. “Our sales costs are too high.” The aim of the cost reductions is to reduce Ergo’s expense ratio in non-life insurance below 30 percent, he added.

Ergo will report a “slightly negative result” this year and is expected to return to a clearly positive result in 2017, Munich Re said in a separate statement. The reinsurer confirmed its full-year profit target of 2.3 billion euros, which it revised last month and which includes a 300 million-euro restructuring charge at Ergo.

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