Climate Crisis Convergence: The Wider Economic Ramifications of Insuring Against Extreme Weather
As the searing heat of southern England continues to bear down on residents, it serves as a stark reminder of the far-reaching consequences of the climate crisis. The economic effects, however, extend far beyond the sweltering classrooms and productivity losses. A recent report from TheCityUK, in collaboration with the insurance firm Marsh, sheds light on the mounting challenge of insuring against extreme weather events, warning of growing “protection gaps” and the need for a more active role from the government.
The traditional actuarial methods used to price insurance policies, which assume a stable underlying probability of loss, are becoming increasingly unreliable as climate hazards intensify. This, in turn, undermines the confidence with which insurers model expected future losses. The report highlights the critical role of insurance in facilitating investment, emphasizing that the difficulties of pricing climate risk will have knock-on effects across the financial system. It is not merely a sectoral issue, but a foundational concern for bankability, investability, and orderly economic activity.
Economists such as Swati Dhingra, an independent member of the Bank of England’s monetary policy committee, are sounding the alarm on the increasing impact of adverse weather events worldwide. She points to the vicious cycle of climate damage, which drives up the cost of investment as insurers and lenders recoup their losses. This, in turn, raises the cost of borrowing for much-needed investments in the transition to net zero and climate adaptation.
The effects of severe weather on UK food inflation are already being felt, with chocolate prices contributing roughly 1 percentage point to inflation in 2025, primarily due to extreme heat in west Africa. A recent analysis from the Energy and Climate Intelligence Unit reveals that 13% of UK food imports last year came from countries that are the least climate resilient, yet most exposed to extreme weather. The consequences for agricultural laborers in these countries are dire, with 216 billion hours lost to heat stress in 2024.
As policymakers grapple with the challenges of the climate crisis, they must also navigate the complex interplay between monetary policy and government tax and spend policies. Dhingra argues that governments may need to be poised to cushion consumers against repeated shocks with targeted support measures, leaving the Bank to focus on the bigger picture. This could involve targeted subsidies, price controls, or temporary tax measures.
In the face of recent economy-wide shocks – Covid, Ukraine, and Iran – politicians have become more willing to intervene in markets. One of Andy Burnham’s early decisions as he takes office will be whether and how much to intervene this autumn. The need for a more active role from the government in moderating the effects of the climate crisis is clear, and policymakers must work together to break the vicious cycle of climate damage and its subsequent economic impacts.
Breaking the Cycle: The Role of Government in Climate Adaptation
As the UK continues to grapple with the economic effects of the climate crisis, it is clear that a more active role from the government is necessary. TheCityUK’s report highlights the importance of developing ways to account for climate resilience in insurance, but also suggests that there may be a need for more public or partly public backstops. Dhingra’s speech emphasizes the need for governments to cushion consumers against repeated shocks, leaving the Bank to focus on the bigger picture.
Monetary policy, in particular, 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 the inflationary impacts of the climate crisis increases the cost of borrowing for much-needed investments in the transition to net zero and climate adaptation. Instead, governments may need to work more closely with the Bank to develop targeted support measures that can help to mitigate the economic effects of the climate crisis.
The Human Cost of Climate Change
As the economic effects of the climate crisis are felt in the UK, it is essential to remember the human cost of climate change. Agricultural laborers in the countries most exposed to extreme weather are already paying the price, with 216 billion hours lost to heat stress in 2024. The consequences for food prices and availability are also significant, with chocolate prices contributing roughly 1 percentage point to inflation in 2025.
The Energy and Climate Intelligence Unit’s analysis highlights the critical role of imports from climate-vulnerable countries in the UK’s food supply. 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 are just a few examples of the many foodstuffs that are vulnerable to the impacts of climate change. As the UK continues to navigate the challenges of the climate crisis, it is essential to prioritize the needs of those most affected.
Forward-Looking: A Call to Action
As the UK faces the economic effects of the climate crisis, it is clear that a more active role from the government is necessary. Policymakers must work together to break the vicious cycle of climate damage and its subsequent economic impacts. This will require a coordinated effort from the government, the Bank of England, and other stakeholders to develop targeted support measures that can help to mitigate the economic effects of the climate crisis.
Andy Burnham’s early decisions as he takes office will be critical in shaping the UK’s response to the climate crisis. Whether and how much to intervene in markets this autumn will be a crucial test of his commitment to addressing the economic effects of climate change. As the UK continues to grapple with the challenges of the climate crisis, it is essential to prioritize the needs of those most affected and to work towards a more sustainable and resilient future.