Flooding in Cornwall, UK © Dawn Hudson
The UK housing market and the banking system that funds it is currently shielded from the full impact of rising flood risk due to a collective insurance programme, but the threat to financial stability has not been banished, experts warn.
In its most recent financial stability report, the Bank of England noted that around six million people live in flood risk areas and that figure will rise steeply by 2050.
The BoE warned that the 1% of properties most likely to be flooded could lose 20% of their value in the most pessimistic climate scenarios.
The UK government launched a subsidised programme in 2016 called Flood Re to make home insurance more affordable in flood-prone areas. The programme, which is due to expire in 2039, is funded by a levy on all UK home insurance policies and it roughly halves the average insurance premium of flooded properties.
“As physical climate-related risks increase over the longer term, and the Flood Re scheme ends, financial stability risks could develop,” the BoE report said.
“As flood risks intensify and become more proximate, prospective homebuyers in flood prone areas may start to anticipate reduced insurance availability and substantially higher insurance premia. Prospective buyers may therefore seek property price discounts to compensate for both of these factors.”
Reinsurer Swiss Re estimates that 21% of the potential economic losses from natural disasters are not insured in the UK,
In the US, the figure is double that at 42%, Swiss Re estimates, with insurance premiums jumping due to climate change, helping to push up inflation.
US insurance company Marsh McLennan estimates that 18% of the global population is currently threatened by flooding, with that figure set to double even if global warming is limited to 2°C. Only 17% of global economic losses were insured between 2007 and 2021.
Rising flood risk threatens mortgage lenders
The impact of climate change on insurance markets has been systematically underestimated, with implications for financial stability, said Professor Ilan Noy, chair in the economics of disasters and climate change at Te Herenga Waka, Victoria University of Wellington, in an article for Green Central Banking.
“The insurance market’s current instability may be the canary of much larger economic dislocations to come. This creates an imperative for financial regulators to better understand and act on climate-related risks in the insurance sector,” he said.
British economist Ann Pettifor said a potential hit to UK house prices from rising flood risk could be a threat to the mortgage lenders.
“That is a big stability risk because so much debt has been leveraged against what is essentially a finite quantity of assets,” she said. “The devaluation of assets has been the major cause of financial crises.”
A study from Bayes Business School suggests that one in six properties in England will be affected by flood risk by 2050 and it shows the issue already weighs on house prices.
Homes at risk of flooding are sold at 8% lower prices, while the highest risk properties face a hit to their selling price of as much as 32%, according to data provided to Bayes by UK property website Rightmove on listings and transactions that took place between 2006 and 2022.
“One out of six properties are at risk and one in 12 is at very high risk so it’s enough to drive the housing market down,” said Alexandros Skouralis, research fellow at Bayes Business School who was one of the report authors.
While Flood Re has been praised as an innovative way to give coverage to otherwise uninsurable properties, some argue that the approach does not give incentives for households and policy makers to invest in flood management and risk reduction efforts.
Short risk horizons run risk of mortgage defaults
Skouralis said banks should be worried about the planned end of Flood Re in 2039 as it could result in uninsurable properties becoming unsaleable, increasing the risk of mortgage defaults. He said the situation was reminiscent of the hit to property prices after the Grenfell Tower disaster in London in 2017, when a residential tower block fire caused the deaths of 72 people and led to a new awareness of the fire risks from unsafe building cladding.
“Both lenders and surveyors behave like they are myopic. They don’t look beyond five years,” he said. “Fifteen years [until the end of Flood Re] seems like a lot of time but actually it’s not for a property that someone would buy today as they will be in the middle of repaying their mortgage.”
The Bayes report also noted that the value of lower priced properties is likely to be more affected by flood risk than those priced higher.
“There is an aspect of inequality there,” Skouralis said, noting that higher income households are in a better position to absorb the consequences of flooding and pay higher insurance premiums.
The UK government might eventually be forced to extend the Flood Re plan, Skouralis predicted, suggesting that the BoE could push for the transition to be smoother or for an extension on financial stability grounds.
This page was last updated January 28, 2025
Written by
Emma Thomasson is a British journalist, consultant and trainer based in Berlin. She is an expert in economics, politics, business and technology. She previously worked for Reuters as a correspondent and bureau chief in Germany, Switzerland, the Netherlands, South Africa and the UK.
