As extreme weather events become more common, the rising cost of insuring against the climate crisis will have wider knock-on effects for the UK economy, according to a report from finance lobby group TheCityUK and insurer Marsh. The report warns that traditional actuarial methods for pricing insurance are becoming less reliable as climate hazards intensify, leading to growing "protection gaps" for homeowners and businesses.
Insurance Pricing Challenges Undermine Financial Stability
TheCityUK's report argues that the difficulty of pricing climate risk is not simply a sectoral issue but a foundational concern for bankability, investability, and orderly economic activity. It states: "Traditional actuarial methods – the basis for insurance pricing – assume the underlying probability of loss is broadly stable year to year. That assumption is becoming less reliable as climate hazards intensify, undermining the confidence with which insurers model expected future losses." This unpredictability could create a vicious cycle, where too little is spent on adapting to climate risks, increasing the cost of climate damage and raising the cost of investment as insurers and lenders recoup their losses.
Government Intervention Needed to Protect Consumers
Swati Dhingra, an economist and independent member of the Bank of England's Monetary Policy Committee, also highlighted the need for a more active government role. In a speech, she pointed to the increasing impact of adverse weather events on UK inflation. For example, she noted that chocolate alone contributed roughly 1 percentage point to UK food inflation in 2025, reflecting a surge in cocoa prices driven by extreme heat in west Africa.
Climate Shocks Hit UK Food Imports
Further evidence came from the Energy and Climate Intelligence Unit (ECIU), which found that 13% of UK food imports last year came from countries that are the least climate resilient yet 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 ECIU calculates that agricultural labourers across the 15 most climate-vulnerable countries lost 216bn hours to heat stress in 2024.
Monetary Policy as a Blunt Instrument
Dhingra argues that monetary policy is a blunt instrument for dealing with relative-price shocks arising from climate change, energy markets, or the green transition. Raising interest rates to offset inflationary impacts of the climate crisis also increases the cost of borrowing for investments in net zero and climate adaptation. She suggests governments may need to cushion consumers with targeted support measures such as subsidies, price controls, or temporary tax measures, allowing the Bank to focus on the bigger picture.
Policymakers Must Protect the Green Transition
With shocks from Covid, Ukraine, and the Iran war, politicians have become more used to intervening in markets. TheCityUK and Dhingra both emphasize that in the era of the climate emergency, policymakers must be ready to act while protecting the green transition. The report suggests public or partly public backstops may be necessary to address the insurance challenges posed by climate change.
