Climate change, cybercrime, an aging population: society isn’t looking too hot for the Average Joe. But it’s a different story for insurers.

The benefits aren’t immediately obvious. In the last few years, climate change-linked disasters have led to bumper payouts: 2018’s California Camp Fire, for example, cost insurers $12 billion. But over time, people are going to become more tuned into these new risks, and the number of policies taken out to guard against them will start to climb. Insurers, meanwhile, will be able to keep upping their premiums.

The globe’s aging population also provides ample opportunities for insurers – especially those that have diversified into other products. Longer lives mean bigger pensions, more annuities, and pricier health insurance products. And as the population’s wealth grows in emerging markets like China and India, there’s huge potential for growth in those markets. Half-year profits at China’s Ping An, the world’s biggest insurer, grew a massive 68% between 2018 and 2019 alone.

Then there are dangers like “ransomware”, where hackers infiltrate a business’s computer systems and threaten to delete all the data unless the victim pays a ransom. Insurers often pay these ransoms on the firm’s behalf because it’s cheaper than recovering the data. But that tends to encourage the hackers, which in turn increases the risk of cybercrime… and the demand for insurance policies.

What about insurance-linked securities? We’re glad you asked. In future, profits could also be set to grow thanks to the rise of “insurance-linked securities” (ILS) – financial products that transfer risk from companies directly to investors.

“Catastrophe bonds” are the best-known example. If an insurer is exposed to $200 million in hurricane-damage losses, it might issue catastrophe bonds for investors to buy. Their cash will then be put into a special account earmarked for hurricane costs. If the insurer's losses go over a certain threshold, the investors’ money covers the rest (and the investors lose out). But if the hurricane passes without major incident, the investors are paid a dividend that is typically greater than your garden variety bond yield.

Catastrophe bonds and similar products have exploded in popularity in recent years, as they’re pushing the risk away from insurers and onto investors. That means insurers will increasingly be able to manage money without taking on the same kind of risk, creating an even more attractive business model than today’s.

But that also means they’ll have to confront the same challenge as every other money manager in the world: plummeting interest rates. Low (or even negative) returns from government bonds mean an insurers’ typical strategy of playing it safe will no longer cut it. That means they’re now hunting for returns elsewhere – in riskier bonds, private equity, and real estate.

And that’s not insurance firms’ only challenge. As you’ll see in the next session, technology is upending the status quo of the industry – as well as presenting swathes of new opportunities for those who learn to adapt.

The takeaway: Increased global risk is providing all sorts of new opportunities for insurers, but they might still be hamstrung by widespread low interest rates.