Rising cost of insuring against climate crisis will have wider knock-on effects for UK economy

Because of important role of insurance in oiling wheels of investment, CityUK says the difficulties of pricing climate risk will have knock-on effects across the financial system. Photograph: Tolga Akmen/EPA View image in fullscreen Because of important role of insurance in oiling wheels of investment, CityUK says the difficulties of pricing climate risk will have knock-on effects across the financial system. Photograph: Tolga Akmen/EPA Rising cost of insuring against climate crisis will have wider knock-on effects for UK economy Heather Stewart As extreme weather events become more common, economists say government will need to take more active role to protect consumers Anyone attempting to notch up a productive day’s work in the searing heat of southern England this last week was left in little doubt about the impact of extreme weather . But the economic effects of the climate crisis for the UK are not confined to the many hours lost to quietly perspiring – or fetching kids dismissed early from scorching classrooms. A pair of well timed interventions from finance lobby group The CityUK and Swati Dhingra, the economist and independent member of the Bank of England’s monetary policy committee (MPC), made that point powerfully last week. As Andy Burnham races towards No 10 , both pointed to the need for a more active role for government in moderating the effects of the crisis in the years ahead. CityUK’s report, written with the insurer Marsh, focused on the mounting challenge of insuring homeowners and businesses against the costs of extreme weather events. With such events, including wildfires and floods, happening increasingly frequently and with growing severity, it argues the risk of damage is becoming more difficult for insurers to price; and warns of growing “protection gaps”. “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,” it said. That’s a tragedy for those affected, whose homes and livelihoods are left uninsured in the face of natural disasters. But because of the important role of insurance in oiling the wheels of investment, CityUK argues that the difficulties of pricing climate risk will also have knock-on effects across the financial system. It is, they say, “not simply a sectoral issue, but a foundational concern for bankability, investability, and orderly economic activity”. Of course, a financial lobby group has an interest in alerting us to the travails of the insurance sector, for which few are likely to shed a tear. But they are right to warn that the unpredictability and severity of weather events is likely to be increasingly felt more widely. And they say that could create a vicious cycle, in which too little is spent on adapting to climate risks, which increases the cost of climate dama