In places, climate change is increasingly becoming a financial stability issue as increasing proportion of economic activity and value is left uninsured or underinsured and creating a widening protection gap.
Strain on insurance markets is feeding through to lending, investment and asset values, reducing bankability and investability across the economy.
The UK has a major opportunity to lead in resilience finance by mobilising capital and developing practical market solutions.
Rising climate risks are putting growing pressure on insurance markets in places, with consequences that could reach far beyond insurance and impact financial stability, a new report by TheCityUK and Marsh warns.
The report, ‘Mind the Protection Gap: The risk to capital markets and the resilience financing imperative’, makes clear that as climate risks make insurance cover more expensive, narrower or harder to secure in certain places, the knock-on effects are felt across capital markets, public finances and the wider economy.
The report warns that finance for adaption and resilience is not yet flowing at the scale needed, with investment held back by short-term decision making, fragmented project pipelines and the difficulty in valuing avoided losses. Without urgent action, underinvestment in resilience could make insurance less available and less affordable, reducing investment and leaving more losses to be paid for by households, businesses and the public sector.
Given the UK’s position as a leading global centre for insurance and capital markets, it is exposed to both domestic climate risk, as well broader shifts in global financial conditions. However, the report also highlights a significant opportunity for the UK’s financial and related professional services industry. With deep capital and insurance markets, the UK is well placed not only to mobilise the significant levels of capital required for adaptation and resilience, but also to support the development of innovative solutions. This includes scaling blended finance and public-private partnerships, expanding the use of alternative risk transfer tools such as parametric insurance and insurance-linked securities, and embedding resilience within mainstream lending, investment and underwriting decisions. These capabilities position the UK to play a leading role in developing practical solutions to close protection gaps, strengthen financial stability and support long-term economic growth at home and internationally.
Miles Celic OBE, Chief Executive Officer, TheCityUK, said; "Climate risk is no longer just an environmental or insurance issue, it is a rapidly increasing economic and capital markets challenge. Insurance underpins lending and investment across the economy, so when cover becomes harder to access or more expensive, the impact can be felt through borrowing costs, investment decisions and asset values.
Adaptation and resilience are now critical parts of our economic infrastructure and essential to ensure insurability and supporting effective functioning capital markets in a climate-constrained world.”
Charles Sincock, Strategy and Sustainability Managing Director, Marsh, said; “Closing the protection gap will require more than risk transfer alone. We need practical solutions that reward resilience, attract long-term capital and help businesses, communities, and economies adapt with greater confidence.”
The report sets out four key recommendations for government and industry to strengthen resilience and reduce protection gaps, including:
Earlier pricing and governance of physical climate risks
Financial institutions and real economy actors should make greater use of forward-looking physical climate risk data to inform underwriting, lending, investment and strategic planning, while monitoring insurance market conditions as an indicator of emerging risk.
Reward active risk reduction, not just risk transfer
Banks, investors and insurers should better recognise verified resilience measures in financing and insurance terms, while policymakers explore ways to reflect the value created through avoided losses and reduced exposure.
Build an investable pipeline of resilience projects aligned to national adaptation outcomes
Governments and industry should develop clearer adaptation priorities, stronger project preparation capability and investable programmes that can attract long-term private capital, while embedding resilience into routine business investment decisions.
Use public policy and blended capital to solve coordination failures
Governments should deploy targeted interventions where markets alone are unlikely to deliver, including guarantees, co-investment structures and public-private partnerships that crowd in private capital without distorting underlying risk signals.