Climate risks could render millions of UK households uninsurable – BoE

June 13, 2022|Written by David Clarke|Bank of England

Millions of UK households could be forced to go without insurance in the event that insufficient action is taken to arrest rising temperatures, according to the findings of the Bank of England’s (BoE) first climate stress test.

Stefan Claus, the BoE’s head of insurance analytics, said insurers’ responses to the 2021 Climate Biennial Exploratory Scenario exercise (CBES) indicated future cover could become prohibitively expensive for households or businesses, or potentially not available at all – particularly if insurers feel they can no longer accurately assess climate risks.

The CBES findings suggest that 7% of UK households, roughly four million, could be forced to go without home insurance under a scenario where governments around the world fail to enact policy responses to global heating. Climate-related losses would be concentrated in certain postcodes such as those in flood zones. Households in those areas will also be hit by falling home values and by challenges remortgaging their properties.

However Claus hinted at a more favourable outlook for insurers themselves. Speaking at an industry conference he said that according to the CBES, firms should be able to absorb the costs from the transition to net-zero, partly because some losses will be passed to policyholders through lower returns in savings and retirement products.

The fact that insurers appear resilient under even the more pessimistic scenarios suggests they should be able to play a vital role in financing the transition to net zero and driving improvements in preparedness against physical risks, Claus added.

“This will help reduce the (much bigger) risks to businesses and households, and will also bring opportunities in financing or insuring the new industries and infrastructure needed in an economy responding to climate change,” he said.

Following the CBES, the BoE says it is now focused on addressing gaps in both the data and modelling abilities of firms and regulators to assess climate risks, and in the scope of the capital framework to adequately cover them. It is holding a conference on climate change and capital requirements in late 2022, and is looking to cooperate with international partners to consider how the current arrangements might be adapted.

The UK Treasury has already acknowledged that the current solvency capital requirement calculation for insurers may not be well suited for long-dated risks such as those arising from climate change. The environmental law charity ClientEarth has argued that insurers should be required to hold additional capital against both investments and liabilities linked to fossil fuels, in particular those associated with new fossil fuel projects.

This page was last updated June 15, 2022

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