TheCityUK has warned that the rising cost of insuring against the climate crisis will have wider knock-on effects for the UK economy, as extreme weather events become more frequent and severe. In a report written with insurer Marsh, the finance lobby group highlighted the mounting challenge of insuring homeowners and businesses against the costs of wildfires, floods, and other disasters, warning of growing 'protection gaps'.
Insurance pricing under pressure
The report 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 leaves many affected individuals without insurance for their homes and livelihoods.
Because insurance plays a crucial role in facilitating investment, TheCityUK argues that the difficulties of pricing climate risk will have knock-on effects across the financial system. It is 'not simply a sectoral issue, but a foundational concern for bankability, investability, and orderly economic activity,' the report says.
Vicious cycle of underinvestment
The report warns that this could create a vicious cycle: too little spending on climate adaptation increases the cost of climate damage, which in turn raises the cost of investment as insurers and lenders recoup their losses. The private sector could do more, such as developing ways to account for climate resilience in insurance, but the report suggests that public or partly-public backstops may be necessary.
Swati Dhingra, an economist and independent member of the Bank of England’s monetary policy committee, also highlighted related risks in a recent speech. She pointed to the increasing impact of adverse weather events worldwide on UK inflation. For example, 'Chocolate alone contributed roughly 1 percentage point to UK food inflation in 2025, reflecting a surge in cocoa prices driven largely by extreme heat in west Africa and the fact that chocolate accounts for close to 6% of the UK food basket,' Dhingra said.
Food imports and inflation
Further evidence came from an analysis by the Energy and Climate Intelligence Unit, which found that 13% of UK food imports in 2024 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 216 billion hours to heat stress in 2024.
When these ripples reach the UK as higher prices, the Bank’s MPC is at the forefront of policy response. However, Dhingra notes that raising interest rates to offset the inflationary impacts of the climate crisis also increases the cost of borrowing for investments in the transition to net zero and climate adaptation. Similarly, using higher rates to constrain inflation from rocketing energy prices due to geopolitical chaos could raise the cost of investing in renewable alternatives.
Need for coordinated policy
Dhingra argues that monetary policy and government tax and spend policies may need to work more closely to break this cycle. 'Monetary policy remains essential for anchoring inflation expectations and preventing temporary price shocks from feeding into broader wage and price-setting, but it is a blunt instrument for dealing with relative-price shocks arising from climate change, energy markets or the green transition,' she said. Governments may need to cushion consumers with targeted support measures, such as subsidies, price controls, or temporary tax measures, leaving the Bank to focus on the bigger picture.
After recent economy-wide shocks—Covid, Ukraine, Iran—politicians have become more accustomed to intervening in markets. In the era of the climate emergency, policymakers must be ready to act while protecting the green transition.
