The emerging risk that’s ‘breaking’ the insurance industry and could make 3 million homes ‘worthless’
Imagine waking up to find your living room under water for the second time in five years. You are trying to make an insurance claim, but are told that your property is no longer insurable. Premiums have tripled. Your mortgage lender is concerned. And your home, your biggest asset, is rapidly losing value.
This is not just a personal disaster. This is a warning sign of a much broader crisis.
Risks associated with climate change are crashing the insurance industry. In the last decade alone, the frequency of floods has increased fourfold in the tropics and 2.5fold in the mid-latitudes. At least one in six people in the UK already live at risk of flooding, extreme rainfall is on the rise and expected annual damages are expected to rise by 27% by the 2050s.
Insurance claims resulting from extreme weather conditions are increasing. The Association of British Insurers (the UK insurance and long-term savings trade body) has reported a record £585 million in home weather damage payouts for 2024.
Climate change is pushing the boundaries of traditional insurance models by causing more frequent and severe events. Insurers are left with little choice but to sharply increase premiums or withdraw coverage altogether. When insurance becomes unaffordable or unavailable, households are put at risk, property values fall, mortgages become harder to secure, and the risk of a broader financial crisis increases.
Our research into the insurance sector shows that the UK’s resilience is lagging behind. Policymakers in the UK tried to avert an insurance crisis by launching Flood Re in 2016, a joint scheme between the government and insurers to keep insurance affordable for households in high-risk areas. It was intended to be a temporary bridge, due to be closed in 2039 when stronger flood defenses and better land use planning were introduced.
But progress was painfully slow. In January 2024, the House of Commons public accounts committee reported that the government’s £5.2bn flood defense program was 40% behind schedule and was expected to protect only 200,000 properties by 2027; this was well short of the original target of 336,000.
By 2025, Flood Re is under increasing pressure. Reinsurance costs have risen by £100 million in just three years and policy purchases have increased by 20% in a single year; both indicate that private insurers are withdrawing from high-risk markets.
In July 2025, Perry Thomas, chief executive of Flood Re, warned that the UK’s overall flood resilience had worsened since the scheme was launched, as mortgage lenders, housebuilders and successive governments had “failed to pull their weight”.
When insurance becomes unaffordable or unavailable, households are left at risk and property values decline, making it difficult to obtain a mortgage. This erosion of collateral threatens the broader financial system: Banks rely on insured properties as collateral, but in the absence of collateral, that collateral rapidly loses value.
Up to 3 million homes in the UK could become effectively worthless within 30 years if the government fails to meet climate adaptation targets.
For the banking sector, this creates the risk that homes will become uninsurable, unmortgageable and stranded assets due to loss of value, leading to increased defaults and increased losses. Unless lenders adopt climate-adjusted risk models that integrate physical hazards such as floods, storms and heat waves, they run the risk of underestimating the true risk of their mortgage portfolios.
About the authors
Meilan Yan is Senior Lecturer in Financial Economics at Loughborough University and Qiuhua Liang is Professor of Water Engineering at Loughborough University. This article is republished from: Speech It is under Creative Commons license. Read original article.
If these mortgages exposed to climate risk are mispriced and then packaged into mortgage-backed securities and sold to investors, the resulting shock could spread to credit markets; Just like the subprime mortgage crisis of 2008, large amounts of subprime home loans to borrowers with poor or limited credit histories can be repackaged and sold as safe investments. The difference is that this time the crash will be due to physical climate damage rather than purely financial mismanagement.
A one way street
Traditional financial crises follow cycles of boom, bust and recovery, but climate risk moves in only one direction. Rising global temperatures are causing more frequent and severe floods and storms. If timely adaptation is not made, the damage will worsen, eroding property values, weakening insurance and threatening financial stability.
Historical insurance models treated extreme weather as rare “tail risks,” but these events are now more frequent, severe and interconnected. The tail becomes “fat” and shocks ripple across sectors and regions. In short, risk is evolving and insurance frameworks need to evolve with it.
Flooding is no longer just an environmental problem. This is a systemic financial threat. Insurers, regulators and lenders must adopt forward-looking models that translate physical climate risks into financial metrics. These models influence market behavior by shaping how capital is allocated, how assets are valued, and how risks are priced.
This guides investment, planning and adaptation – the process of adjusting systems, infrastructure and applications to withstand and recover from climate impacts.
Effective adaptation measures, such as improving flood defenses, reduce the risk of future climate-related damage. It’s a feedback loop: better modeling enables smarter adaptation, which strengthens financial stability.
