Rising cost of insuring against climate crisis will have wider knock-on effects for UK economy | Heather Stewart
Anyone trying to get through a productive day at work in the searing heat of southern England last week was left in little doubt about the impact of extreme weather.
But the economic impacts of the climate crisis on the UK are not limited to hours lost to silent sweating or fetching children who are expelled early from scorching classrooms.
A pair of well-timed interventions by financial lobby group TheCityUK and Swati Dhingra, economist and independent member of the Bank of England’s monetary policy committee, made this point forcefully last week.
As Andy Burnham races towards No 10, both have pointed out the need for the government to play a more active role in cushioning the blows of the crisis in the coming years.
The report, written by TheCityUK with insurer Marsh, focused on the growing difficulty of insuring homeowners and businesses against the costs of extreme weather events.
With such events, including wildfires and floods, occurring more frequently and with increasing severity, it argues that it is becoming more difficult for insurers to price the risk of damage and warns of growing “protection gaps”.
“Traditional actuarial methods, the basis of insurance pricing, assume that the underlying probability of loss is generally stable from year to year. As climate hazards intensify, this assumption becomes less reliable and undermines confidence in the modeling by which insurers expect future losses,” the statement said.
This is a tragedy for those affected, whose homes and livelihoods are left uninsured in the face of natural disasters.
But due to insurance’s important role in oiling the wheels of investment, TheCityUK argues that challenges in pricing climate risk will also have knock-on effects on the financial system. They say this is “not just a sectoral issue, but a fundamental concern for bankability, investability and orderly economic activity.”
Of course, a financial lobby group has an interest in warning us about the woes of the insurance industry, for which few would shed a tear.
But they are right to warn that the unpredictability and severity of weather events will be felt more and more widely.
And they say this could create a vicious cycle that leads to too little spending on adapting to climate risks, which in turn increases the cost of climate damage and therefore the cost of investment as insurers and lenders recoup their losses.
The report argues that there is more the private sector can do, for example by developing methods to take climate resilience into account in insurance. But it also suggests that there may need to be more public or partially public points of support.
Dhingra’s speech points to another related vicious circle. It highlights the increasing impact of adverse worldwide weather events, such as drought or extreme rainfall, on UK inflation.
As just one example, it says: “Chocolate alone contributed roughly 1 percentage point to UK food inflation in 2025, largely reflecting the rise in cocoa prices driven by extreme heat in West Africa and the fact that chocolate accounts for close to 6% of the UK food basket.”
In fact, there’s new evidence about the impact of severe weather on our shopping carts An analysis by the Energy and Climate Intelligence Unit (ECIU) last weekLast year it was revealed that 13 per cent of Britain’s food imports came from countries that are least climate resilient but most exposed to extreme weather.
These imports include rice from India, soft and citrus fruits from South Africa, Peru and Egypt, coffee from Vietnam and Brazil, Colombian and Ecuadorian bananas, and Kenyan tea.
The few cents in the price of a bar of chocolate or a bunch of bananas are a minor inconvenience compared to the punishing conditions endured by workers in these countries. The ECIU calculates that agricultural workers in the 15 most climate-sensitive countries will lose 216 billion hours due to heat stress in 2024.
But when volatility reaches the UK in the form of higher prices, the Bank’s MPC is at the forefront of the policy response. But as Dhingra points out, raising interest rates to offset the inflationary effects of the climate crisis also increases the cost of borrowing to make much-needed investments in the transition to net zero and climate adaptation.
Similarly, using higher rates to limit the inflationary effects of skyrocketing energy prices resulting from geopolitical chaos (most recently the Iran war) could increase the cost of investing in renewable alternatives that would help protect the UK from such chaos.
His argument is that monetary policy (in other words, interest rates) and government tax and spending policies may need to work more closely to break this cycle.
“Monetary policy remains essential to anchor inflation expectations and prevent temporary price shocks from being reflected in broader wage and price setting, but it is a blunt instrument in dealing with relative price shocks from climate change, energy markets or the green transition,” he says.
Instead, he argues, governments may need to be prepared to buffer consumers against these recurring shocks with targeted support measures, allowing the Bank to focus on the bigger picture and avoiding the knock-on effects of green infrastructure investments. This could mean targeted subsidies, price controls or temporary tax measures.
Following a series of recent economy-wide shocks (Covid, Ukraine, Iran), politicians have become more accustomed to entering markets in a way that until recently was taboo.
One of Burnham’s first decisions will be whether and how much to intervene this autumn to prevent, for example, the full force of the Middle East crisis from being felt on public energy bills.
But in the age of climate emergency, shocks are coming thick and fast; and policymakers need to be ready to act while protecting the green transition.
