Interview with SRP (part 2)

The following is an article that appeared in

Institutions Eye the Advisory Side of the Retirement Solutions Sector

31 Jan 2013

Karl Strobl is the former global head of structured products and retirement solutions in Deutsche Bank’s asset management division, and a specialist in retirement and defined-contribution (DC) pensions policy. In this second instalment of our interview, he tells SRP about the increasing need for the DC sector to use structuring, derivatives, exotics, hybrids and longevity products, and to keep a keen eye on capital regulations and the public debate on policy.

Currently, according to Strobl, the background of tightening capital requirements is forcing the largest and most successful players to either throttle back their sales capacity or reduce the protection –  in other words, increase the pricing – in their products.

Strobl said there are ways to relieve the demand for capital from the insurance industry, while reducing systemic risk in the financial system: “Imagine people on average living longer than expected [as is already the case] – who bears the risk that income guarantees now lose money and erode risk capital simply because of the wonderful gift of mankind’s longevity?

“In DC, it will be the financial sector, if anyone at all, with the government as an insurer of last resort. But with capital shortage and increasing capital requirements, products don’t get distributed widely enough to hedge longevity risk for the 99%, meaning there is also little competitive pricing pressure. This in turn hurts the savers, who either pay too much or simply run the risk of running out of assets in their lifetime. Premiums rise, annuity rates drop, and the simple political solution of inter-generational risk transfer is not at all a sustainable option given the impending demographic shifts.”

The really unsustainable part of all this, Strobl added, is that the people most affected are those who are still saving. In other words, the risks will be concentrated precisely on that ever-smaller part of the population who we need to drive growth.

“If you could mutualise some insurance risk amongst the insured, by linking, for example, the level of income guarantee to realised mortality [among those who are already retired], the cost of insurance would be borne by those who benefit most from higher longevity,” he said. “And you would spread the risk into a growing demographic rather than a shrinking one.”

In effect, he added, if too many “insured events” occur, the insurance payout would get adjusted down, “which should be very palatable if the ‘insured event’ is that we all live too long!”

This would mean that the risk to the insurance industry would decrease, which would decrease capital demand, but crucially it might also reduce the margins in the product. Here, perhaps, is where the different players in the game – the savers, the retirees, the financial institutions and the government – no longer have perfectly aligned incentives. The result, Strobl said, is that we read every day about a big insurer somewhere in the world trying to reduce the terms, or the sales volumes, of their retirement income products, “hurting those who retire tomorrow”.

We cannot wait for the financial industry to solve this through better products alone, he said. Even if the industry is short of capital, and even if the rules aren’t conducive to attracting new capital either, that does not necessarily hurt insurers or banks, which may well be able to pass costs on through even higher pricing in an already under-supplied market. “Their responsibility is to their shareholders, and if you create an environment where distributing less products in an inefficient market is almost more attractive than making the market bigger and more efficient, then this is a dilemma not for the industry, but for policymakers to solve.

“Product simplicity, mass-customisation and smarter risk sharing across the financial system and across society are all components that need to be put in place,” he said – “not for the benefit of the industry, but for the benefit of all of us. Only a full combination of measures can produce more capacity for, and a wider distribution of, income guarantees, which in turn reduces the risks to the sovereign balance sheet.

“To be fair, there has been tremendous interest by institutions to get involved in this new advisory side of the business, but institutions also learn quickly about the advantage of using an independent adviser compared to absorbing policy advice into their business model,” Strobl explained. “When you are a player asking to change the game, it doesn’t always work. Your heart may be truly in the right place for solving socio-political problems on that scale, but the politics of banking and insurance today mean you’ll be listened to more if you are independent.”

He did admit, however, that an independent asset or asset-liability manager, or an asset consultant, may be a useful strategic fit for his own business model further down the line.

Strobl left Deutsche Bank in October 2012, having joined in 2005. He held a number of senior positions including global head of equity trading, and was the youngest and one of the longest-serving members of the asset management division’s global operating committee.

He reported to the bank’s head of asset management, Kevin Parker, who also left last year when Josef Ackermann stepped down as the chief executive of the bank.

Before joining Deutsche, Strobl was at ABN Amro, where he held a number of positions in the investment banking division, including: global head of exotic products trading – equity, FX, commodities and hybrids; global head of retail products trading across asset classes; special situations trader; and quantitative analyst, equity and hybrids. He has a PhD from Cambridge and taught at Sussex University as a theoretical particle physicist and cosmologist.

Strobl is a specialist in retirement savings products, lifetime income, retirement systems and policy, as well as in structured products, exotic derivatives, mathematical finance, and trading.

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