Imagine waking up to find your living room underwater for the second time in five years. You try to claim insurance, only to be told your property is now uninsurable. Premiums have tripled. Your mortgage lender is concerned. And your biggest asset, your home, is rapidly losing value.
This isn’t just a personal disaster. It’s a warning sign of a much broader crisis.
The risks associated with climate change are breaking the insurance industry. In the past decade alone, flood frequency has increased fourfold in the tropics and 2.5 times in mid-latitude regions. In the UK, at least one in six people already live with flood risk, heavy-rainfall extremes are increasing, and expected annual damages could rise by 27% by the 2050s.
Insurance claims from extreme weather are surging. The Association of British Insurers (the UK insurance and long-term savings trade body) reports a record £585 million in home weather-damage payouts for 2024.
Climate change is driving more frequent and severe events, pushing traditional insurance models to their limits. Insurers are left with little choice but to raise premiums sharply or withdraw coverage entirely. When insurance becomes unaffordable or unavailable, households are exposed, property values fall, mortgages become harder to secure, and the risk of a wider financial crisis grows.
Our research into the insurance industry shows that UK resilience is falling behind. Policymakers in the UK tried to avert an insurance crisis by launching Flood Re in 2016, a joint scheme between government and insurers designed to keep insurance affordable for households in high-risk areas. It was meant as a temporary bridge, due to close in 2039 once stronger flood defences and better land-use planning are in place.
But progress has been painfully slow. In January 2024, the House of Commons public accounts committee reported that the government’s £5.2 billion flood defence programme is 40% behind schedule and expected to protect just 200,000 properties by 2027 — far short of its original 336,000 target.
By 2025, Flood Re has been under mounting strain. Reinsurance costs had have risen by £100 million in just three years, and policy uptakes have jumped by 20% in a single year – both signs that private insurers were retreating from high-risk markets.
In July 2025, Flood Re’s CEO, Perry Thomas, warned that the UK’s overall flood resilience have worsened since the scheme’s launch, as mortgage lenders, housebuilders, and successive governments have “failed to pull their weight”.
When insurance becomes unaffordable or unavailable, households are left exposed and property values decline, making mortgages harder to obtain. This erosion of coverage threatens the wider financial system: banks rely on insured property as collateral, but without cover, that collateral rapidly loses value.
If the government fails to meet its climate adaptation targets, as many as 3 million UK homes could become effectively worthless within 30 years.
For the banking sector, this creates the risk of homes becoming stranded assets — uninsurable, unmortgageable and falling in value — leading to rising defaults and mounting losses. Unless lenders adopt climate-adjusted risk models that integrate physical hazards such as flooding, storms and heatwaves, they risk underestimating the true exposure of their mortgage portfolios.
About the authors
Meilan Yan is a Senior Lecturer in Financial Economics at Loughborough University and Qiuhua Liang is a Professor of Water Engineering at Loughborough University. This article is republished from The Conversation under a Creative Commons license. Read the original article.
If these climate-risk-exposed mortgages are mispriced and then bundled into mortgage-backed securities and sold to investors, the resulting shock could cascade through credit markets – like the 2008 subprime mortgage crisis, when large volumes of high-risk home loans to borrowers with poor or limited credit histories were repackaged and sold as safe investments. The difference is that this time the crash would be driven by physical climate damage rather than purely financial mismanagement.
A one-way street
Traditional financial crises follow cycles of growth, downturn and recovery, but climate risk moves in only one direction. Rising global temperatures are driving more frequent and severe floods and storms. Without timely adaptation, the damage compounds, eroding property values, undermining insurance and threatening financial stability.
Historical insurance models treated extreme weather as rare “tail risks,” but these events are now more frequent, severe, and interconnected. The tail is becoming “fat,” and shocks ripple across sectors and regions. In short, risk is evolving and insurance frameworks must evolve with it.
Flooding is no longer just an environmental issue. It is a systemic financial threat. Insurers, regulators and lenders must adopt forward-looking models that translate physical climate risks into financial metrics. These models influence market behaviour by shaping how capital is allocated, assets are valued, and risks are priced.
This, in turn, guides investment, planning and adaptation — the process of adjusting systems, infrastructure and practices to withstand and recover from climate impacts.
Effective adaptation measures, such as upgraded flood defences, reduce the future risk of climate-related damage. It’s a feedback loop: better modelling enables smarter adaptation, which in turn strengthens financial stability.